Evolent Health, Inc. - Quarter Report: 2020 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

_________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37415

_________________________

Evolent Health, Inc.

(Exact name of registrant as specified in its charter)

_________________________

Delaware

32-0454912

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

800 N. Glebe Road

Suite 500

Arlington

Virginia

22203

(Address of principal executive offices)

(Zip Code)

(571) 389-6000

Registrant’s telephone number, including area code

_________________________

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock of Evolent Health, Inc., par value $0.01 per share	EVH	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes S No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer S Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No S

As of November 2, 2020, there were 85,778,739 shares of the registrant’s Class A common stock outstanding.

Evolent Health, Inc.

Table of Contents


Item		Page
	PART I
1.	Financial Statements (Unaudited)	1
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
3.	Quantitative and Qualitative Disclosures About Market Risk	61
4.	Controls and Procedures	62

	PART II
1	Legal Proceedings	64
1A.	Risk Factors	64
2.	Unregistered Sales of Equity Securities and Use of Proceeds
3.	Defaults Upon Senior Securities
4.	Mine Safety Disclosures	65
5.	Other Information	65
6.	Exhibits	66

	Signatures	67

Explanatory Note

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, “Evolent,” the “Company,” “we,” “our” and “us” refer to Evolent Health, Inc. and its consolidated subsidiaries. Evolent Health LLC, a subsidiary of Evolent Health, Inc. through which we conduct our operations, has owned all of our operating assets and substantially all of our business since inception. Evolent Health, Inc. is a holding company and its principal asset is all of the Class A common units of Evolent Health LLC.

FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE

Certain statements made in this report and in other written or oral statements made by us or on our behalf are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: “believe,” “anticipate,” “expect,” “estimate,” “aim,” “predict,” “potential,” “continue,” “plan,” “project,” “will,” “should,” “shall,” “may,” “might” and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services, future performance or financial results and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.

These statements are only predictions based on our current expectations and projections about future events. Forward-looking statements involve risks and uncertainties that may cause actual results, level of activity, performance or achievements to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others:

•the potential negative impact of the COVID-19 pandemic;

•the economic benefits we expect to receive as a result of the sale of certain assets of Passport may not be realized;

•the significant portion of revenue we derive from our largest partners, and the potential loss, termination or renegotiation of our relationship or contract with any significant partner, or multiple partners in the aggregate;

•the structural change in the market for health care in the United States;

•uncertainty in the health care regulatory framework, including the potential impact of policy changes;

•uncertainty in the public exchange market;

•the uncertain impact of CMS waivers to Medicaid rules and changes in membership and rates;

•the uncertain impact the results of elections may have on health care laws and regulations;

•our ability to effectively manage our growth and maintain an efficient cost structure, and to successfully implement cost cutting measures;

•our ability to offer new and innovative products and services;

•risks related to completed and future acquisitions, investments, alliances and joint ventures, including the acquisition of assets from New Mexico Health Connections, and the acquisitions of Valence Health Inc., excluding Cicerone Health Solutions, Inc., Aldera Holdings, Inc., NCIS Holdings, Inc. (“New Century Health”), and Passport, which may be difficult to integrate, divert management resources, or result in unanticipated costs or dilute our stockholders;

•our ability to consummate opportunities in our pipeline;

•risks relating to our ability to maintain profitability for our total cost of care and New Century Health’s performance-based contracts and products, including capitation and risk-bearing contracts;

•the growth and success of our partners, which is difficult to predict and is subject to factors outside of our control, including governmental funding reductions and other policy changes, enrollment numbers for our partners’ plans (including in Florida), premium pricing reductions, selection bias in at-risk membership and the ability to control and, if necessary, reduce health care costs;

•our ability to attract new partners and successfully capture new growth opportunities;

•the increasing number of risk-sharing arrangements we enter into with our partners;

•our ability to recover the significant upfront costs in our partner relationships;

•our ability to estimate the size of our target markets;

•our ability to maintain and enhance our reputation and brand recognition;

•consolidation in the health care industry;

•competition which could limit our ability to maintain or expand market share within our industry;

•risks related to governmental payer audits and actions, including whistleblower claims;

•our ability to partner with providers due to exclusivity provisions in our contracts;

•restrictions and penalties as a result of privacy and data protection laws;

•adequate protection of our intellectual property, including trademarks;

•any alleged infringement, misappropriation or violation of third-party proprietary rights;

•our use of “open source” software;

•our ability to protect the confidentiality of our trade secrets, know-how and other proprietary information;

•our reliance on third parties and licensed technologies;

•our ability to use, disclose, de-identify or license data and to integrate third-party technologies;

•data loss or corruption due to failures or errors in our systems and service disruptions at our data centers;

•online security risks and breaches or failures of our security measures, including with respect to privacy of health information;

•our reliance on Internet infrastructure, bandwidth providers, data center providers, other third parties and our own systems for providing services to our users;

•our reliance on third-party vendors to host and maintain our technology platform;

•our ability to contain health care costs, implement increases in premium rates on a timely basis, maintain adequate reserves for policy benefits or maintain cost effective provider agreements;

•True Health New Mexico’s ability to enter the individual market;

•the risk of a significant reduction in the enrollment in our health plan;

•our ability to accurately underwrite performance-based risk-bearing contracts;

•risks related to our offshore operations;

•our dependency on our key personnel, and our ability to attract, hire, integrate and retain key personnel;

•the impact of additional goodwill and intangible asset impairments on our results of operations;

•our indebtedness, our ability to service our indebtedness, the impact of covenants in our credit agreement on our business, our ability to access the delayed draw loan under our credit facility and our ability to obtain additional financing;

•our ability to achieve profitability in the future;

•the impact of litigation, including the ongoing class action lawsuit;

•our obligations to make payments to certain of our pre-IPO investors for certain tax benefits we may claim in the future;

•our ability to utilize benefits under the tax receivables agreement described herein;

•our obligations to make payments under the tax receivables agreement that may be accelerated or may exceed the tax benefits we realize;

•the terms of agreements between us and certain of our pre-IPO investors;

•the conditional conversion features of the 2024 and 2025 convertible notes, which, if triggered, could require us to settle the 2024 or 2025 convertible notes in cash;

•the impact of the accounting method for convertible debt securities that may be settled in cash;

•the potential volatility of our Class A common stock price;

•the potential decline of our Class A common stock price if a substantial number of shares are sold or become available for sale;

•provisions in our second amended and restated certificate of incorporation and second amended and restated by-laws and provisions of Delaware law that discourage or prevent strategic transactions, including a takeover of us;

•the ability of certain of our investors to compete with us without restrictions;

•provisions in our second amended and restated certificate of incorporation which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;

•our intention not to pay cash dividends on our Class A common stock; and

•our ability to remediate our material weaknesses and to maintain effective internal control over certain instances of one of our claims processing systems.

The risks included here are not exhaustive. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Our Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K"), subsequent Quarterly Reports on Form 10-Q and other documents filed with the SEC include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.

Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2020		December 31, 2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	370,514	$	101,008
Restricted cash and restricted investments	21,985		20,080
Accounts receivable, net (1)	95,317		75,667
Prepaid expenses and other current assets (1)	55,381		28,488
Investments, at amortized cost	4,677		1,807
Contract assets	671		1,751
Total current assets	548,545		228,801
Restricted cash and restricted investments	9,462		8,260
Investments, at amortized cost	11,842		16,751
Investments in and advances to equity method investees	7,473		122,618
Property and equipment, net	88,072		85,155
Right-of-use assets - operating	60,240		72,173
Customer advance for regulatory capital requirements, net of allowances (1)	—		40,000
Prepaid expenses and other noncurrent assets, net of allowances (1)	7,450		6,253
Contract assets	—		999
Contract cost assets	28,491		36,482
Intangible assets, net	275,492		308,459
Goodwill	354,722		572,064
Total assets	$	1,391,789	$	1,498,015
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Liabilities
Current liabilities:
Accounts payable (1)	$	32,177	$	37,488
Accrued liabilities (1)	76,979		33,343
Operating lease liability - current	7,438		6,269
Accrued compensation and employee benefits	28,130		34,691
Deferred revenue	12,459		19,828
Reserve for claims and performance-based arrangements (1)	208,313		61,150
Total current liabilities	365,496		192,769
Long-term debt, net of discount	285,213		293,667
Other long-term liabilities	20,207		11,732
Operating lease liabilities - noncurrent	64,738		68,858
Deferred tax liabilities, net	1,390		1,942
Total liabilities	737,044		568,968
Commitments and Contingencies (See Note 10)
Shareholders' Equity (Deficit)
Class A common stock - $0.01 par value; 750,000,000 shares authorized; 85,756,991 and 84,588,629 shares issued, respectively	858		846
Additional paid-in-capital	1,224,956		1,173,708
Accumulated other comprehensive income (loss)	(320)		(234)
Retained earnings (accumulated deficit)	(574,553)		(251,962)
Treasury stock, at cost; 1,537,582 and 0 shares as of September 30, 2020 and December 31, 2019, respectively	(21,123)		—
Total shareholders' equity attributable to Evolent Health, Inc.	629,818		922,358
Non-controlling interests	24,927		6,689
Total shareholders' equity (deficit)	654,745		929,047
Total liabilities and shareholders' equity (deficit)	$	1,391,789	$	1,498,015

(1) See Note 18 for amounts attributable to unconsolidated related parties included in these line items.

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands, except per share data)


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue
Transformation services (1)	$	4,807	$	5,184	$	10,800	$	10,481
Platform and operations services (1)	230,299		171,438		652,574		463,252
Premiums	29,487		43,521		87,136		136,125
Total revenue	264,593		220,143		750,510		609,858

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below) (1)	183,165		131,763		524,630		357,587
Claims expenses	21,325		34,802		63,136		108,644
Selling, general and administrative expenses (1)	55,758		58,808		160,967		200,578
Depreciation and amortization expenses	14,694		15,408		46,610		44,966
Loss on extinguishment of debt, net	4,789		—		4,789		—
(Gain) loss on disposal of assets	—		—		6,447		(9,600)
Goodwill impairment	—		—		215,100		—
Change in fair value of contingent consideration and indemnification asset	2,570		(500)		(492)		(300)
Total operating expenses	282,301		240,281		1,021,187		701,875
Operating loss	(17,708)		(20,138)		(270,677)		(92,017)
Interest income	1,288		1,124		3,049		3,026
Interest expense	(7,419)		(3,630)		(19,997)		(10,812)
Impairment of equity method investments	—		—		(47,133)		—
Gain (loss) from equity method investees	(13,717)		(3,859)		11,014		(6,187)
Other income (expense), net	(111)		(84)		170		(244)
Loss before income taxes and non-controlling interests	(37,667)		(26,587)		(323,574)		(106,234)
Provision (benefit) for income taxes	503		(849)		(3,131)		53
Net loss	(38,170)		(25,738)		(320,443)		(106,287)
Net loss attributable to non-controlling interests	(822)		(217)		(822)		(2,412)
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(37,348)	$	(25,521)	$	(319,621)	$	(103,875)

Loss per common share
Basic and diluted	$	(0.44)	$	(0.30)	$	(3.87)	$	(1.27)

Weighted-average common shares outstanding
Basic and diluted	85,172		83,819		82,615		81,831

Comprehensive loss
Net loss	$	(38,170)	$	(25,738)	$	(320,443)	$	(106,287)
Other comprehensive loss, net of taxes, related to:
Foreign currency translation adjustment	71		(68)		(86)		(33)
Total comprehensive loss	(38,099)		(25,806)		(320,529)		(106,320)
Total comprehensive loss attributable to non-controlling interests	(822)		(217)		(822)		(2,412)
Total comprehensive loss attributable to common shareholders of Evolent Health, Inc.	$	(37,277)	$	(25,589)	$	(319,707)	$	(103,908)

(1) See Note 18 for amounts attributable to unconsolidated related parties included in these line items.

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited, in thousands)


	For the Three Months Ended September 30, 2020
	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Accumulated Other Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders' Equity Attributable to Evolent Health, Inc.		Non-Controlling Interests		Total Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance as of June 30, 2020	85,457	$	855	—	$	—	$	1,183,605	$	(391)	$	(537,205)	$	—	$	646,864	$	—	$	646,864

Stock-based compensation expense	—	—		—	—		3,164		—		—		—		3,164		—		3,164
Exercise of stock options	265	3		—	—		1,445		—		—		—		1,448		—		1,448
Restricted stock units vested, net of shares withheld for taxes	35	—		—	—		(51)		—		—		—		(51)		—		(51)
Consolidation of equity method investment	—	—		—	—		—		—		—		(21,123)		(21,123)		25,749		4,626
Foreign currency translation adjustment	—	—		—	—		—		71		—		—		71		—		71
Equity component of 2024 notes, net of issuance costs	—	—		—	—		36,793		—		—		—		36,793		—		36,793
Net loss	—	—		—	—		—		—		(37,348)		—		(37,348)		(822)		(38,170)

Balance as of September 30, 2020	85,757	$	858	—	$	—	$	1,224,956	$	(320)	$	(574,553)	$	(21,123)	$	629,818	$	24,927	$	654,745


	For the Three Months Ended September 30, 2019
	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Accumulated Other Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders' Equity Attributable to Evolent Health, Inc.		Non-Controlling Interests		Total Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance as of June 30, 2019	83,815	$	838	706	$	7	$	1,158,325	$	(147)	$	(28,345)	$	—	$	—	$	16,078	$	1,146,756

Stock-based compensation expense	—	—		—	—		3,352		—		—		—		—		—		3,352
Exercise of stock options	13	—		—	—		49		—		—		—		—		—		49
Restricted stock units vested, net of shares withheld for taxes	3	—		—	—		(3)		—		—		—		—		—		(3)
Share retirement	(5)	—		—	—		—		—		—		—		—		—		—
Foreign currency translation adjustment	—	—		—	—		—		(68)		—		—		—		—		(68)
Net loss	—	—		—	—		—		—		(25,521)		—		—		(217)		(25,738)
Reclassification of non-controlling interests	—	—		—	—		(27)		—		—		—		—		27		—

Balance as of September 30, 2019	83,826	$	838	706	$	7	$	1,161,696	$	(215)	$	(53,866)	$	—	$	—	$	15,888	$	1,124,348

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(unaudited, in thousands)


	For the Nine Months Ended September 30, 2020
	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Accumulated Other Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders' Equity Attributable to Evolent Health, Inc.		Non-Controlling Interests		Total Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance as of December 31, 2019	84,589	$	846	—	$	—	$	1,173,708	$	(234)	$	(251,962)	$	—	$	922,358	$	6,689	$	929,047
Cumulative-effect adjustment from adoption of ASU 2016-13	—	—		—	—		—		—		(2,970)		—		(2,970)		—		(2,970)
Stock-based compensation expense	—	—		—	—		10,375		—		—		—		10,375		—		10,375
Exercise of stock options	355	4		—	—		1,970		—		—		—		1,974		—		1,974
Restricted stock units vested, net of shares withheld for taxes	385	4		—	—		(1,386)		—		—		—		(1,382)		—		(1,382)
Consolidation of equity method investment	—	—		—	—		—		—		—		(21,123)		(21,123)		25,749		4,626
Share retirement	(188)	(2)		—	—		(683)		—		—		—		(685)		—		(685)
Class A common stock issued for payment of earn-outs	616	6		—	—		4,179		—		—		—		4,185		—		4,185
Disposal of assets	—	—		—	—		—		—		—		—		—		(6,689)		(6,689)
Foreign currency translation adjustment	—	—		—	—		—		(86)		—		—		(86)		—		(86)
Equity component of 2024 notes, net of issuance costs	—	—		—	—		36,793		—		—		—		36,793		—		36,793
Net loss	—	—		—	—		—		—		(319,621)		—		(319,621)		(822)		(320,443)
Balance as of September 30, 2020	85,757	$	858	—	$	—	$	1,224,956	$	(320)	$	(574,553)	$	(21,123)	$	629,818	$	24,927	$	654,745

	For the Nine Months Ended September 30, 2019
	Class A Common Stock			Class B Common Stock			Additional Paid-In Capital		Accumulated Other Income (Loss)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Shareholders' Equity Attributable to Evolent Health, Inc.		Non-Controlling Interests		Total Equity (Deficit)
	Shares	Amount		Shares	Amount
Balance as of December 31, 2018	79,172	$	792	3,190	$	31	$	1,093,174	$	(182)	$	50,009	$	—	$	—	$	45,532	$	1,189,356
Stock-based compensation expense	—	—		—	—		11,867		—		—		—		—		—		11,867
Exercise of stock options	116	1		—	—		996		—		—		—		—		—		997
Restricted stock units vested, net of shares withheld for taxes	284	3		—	—		(2,411)		—		—		—		—		—		(2,408)
Share retirement	(5)	—		—	—		—		—		—		—		—		—		—
Class A common stock issued for payment of earn-outs	43	—		—	—		800		—		—		—		—		—		800
Issuance of non-controlling interest	—	—		—	—		—		—		—		—		—		6,500		6,500
Shares issued for equity-method investments and asset acquisitions	1,732	18		—	—		23,538		—		—		—		—		—		23,556
Exchange of Class B common stock	2,484	24		(2,484)	(24)		33,946		—		—		—		—		(33,946)		—
Foreign currency translation adjustment	—	—		—	—		—		(33)		—		—		—		—		(33)
Net loss	—	—		—	—		—		—		(103,875)		—		—		(2,412)		(106,287)
Reclassification of non-controlling interests	—	—		—	—		(214)		—		—		—		—		214		—
Balance as of September 30, 2019	83,826	$	838	706	$	7	$	1,161,696	$	(215)	$	(53,866)	$	—	$	—	$	15,888	$	1,124,348

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)


	For the Nine Months Ended September 30,
	2020		2019
Cash Flows Used In Operating Activities
Net loss	$	(320,443)	$	(106,287)
Adjustments to reconcile net loss to net cash and restricted cash used in operating activities:
Change in fair value of contingent consideration and indemnification asset	(492)		(300)
Loss (gain) on disposal of assets	6,447		(9,600)
(Gain) loss from equity method investees	(11,014)		6,187
Depreciation and amortization expenses	46,610		44,966
Goodwill impairment	215,100		—
Equity method investments impairment	47,133		—
Stock-based compensation expense	10,375		15,045
Deferred tax (benefit) provision	(773)		(188)
Amortization of contract cost assets	15,937		4,132
Amortization of deferred financing costs	10,093		6,954
Loss on extinguishment of debt	4,789		—
Interest from customer advance for regulatory capital requirements	(1,788)		(650)
Other current operating cash inflows (outflows), net	1,809		(25)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable, net and contract assets	(15,665)		6,580
Prepaid expenses and other current and noncurrent assets	9,113		(1,491)
Contract cost assets	(7,946)		(14,982)
Accounts payable	(394)		(3,993)
Accrued liabilities	6,264		(20,661)
Accrued compensation and employee benefits	(4,650)		1,580
Deferred revenue	(10,811)		2,117
Reserve for claims and performance-based arrangements	(16,479)		15,478
Right-of-use operating assets	9,493		(24,407)
Operating lease liabilities	(490)		28,547
Other long-term liabilities	4,408		(4,834)
Net cash and restricted cash used in operating activities	(3,374)		(55,832)
Cash Flows From (Used In) Investing Activities
Cash paid for asset acquisitions or business combinations	—		(8,575)
Customer advance for regulatory capital requirements	—		(46,400)
Loan for implementation funding	(400)		5,400
Disposal of non-strategic assets	(2,287)		—
Investments in and advances to equity method investees	—		(17,113)
Impact to cash and cash equivalents and restricted cash from initial consolidation	159,755		—
Purchases of investments	(11,168)		(8,900)
Maturities and sales of investments	140,905		—
Investments in internal-use software and purchases of property and equipment	(23,614)		(26,377)
Purchase and maturities of restricted investments	106		(495)
Net cash and restricted cash from (used in) investing activities	263,297		(102,460)
Cash Flows From (Used In) Financing Activities
Changes in working capital balances related to claims processing on behalf of partners	(2,212)		(22,781)
Amount received from escrow in asset acquisition	—		500
Deferred financing costs related to 2025 Notes	—		(607)

See accompanying Notes to Consolidated Financial Statements


	For the Nine Months Ended September 30,
	2020		2019
Proceeds from issuance of 2024 Notes, net of offering costs	30,062		—
Repurchase of 2021 Notes and lender fees	(16,388)		—
Proceeds from stock option exercises	1,974		997
Taxes withheld and paid for vesting of restricted stock units	(1,382)		(2,408)
Net cash and restricted cash from (used in) financing activities	12,054		(24,299)
Effect of exchange rate on cash and cash equivalents and restricted cash	43		19
Net increase (decrease) in cash and cash equivalents and restricted cash	272,020		(182,572)
Cash and cash equivalents and restricted cash as of beginning-of-period	128,531		388,325
Cash and cash equivalents and restricted cash as of end-of-period	$	400,551	$	205,753

See accompanying Notes to Consolidated Financial Statements

EVOLENT HEALTH, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization

Evolent Health, Inc. was incorporated in December 2014 in the state of Delaware and through its subsidiaries supports leading health systems and physician organizations as well as health plans to move their business models from traditional fee for service reimbursement to value-based care, which we consider to be integrated clinical and financial responsibility for populations. The Company operates through two segments.

The Company’s Services segment (“Services”) includes clinical and administrative solutions designed to help our partners manage and administer patient health in a more cost-effective manner. We have two clinical solutions: (i) total cost of care management and (ii) specialty care management services, and one administrative solution: comprehensive health plan administrative services. From time to time, we package our solutions under various go-to-market brand names to create product differentiation. Our partners may engage us to provide one type of solution, or multiple types of solutions, depending on specific needs. True Health is our second reportable segment. True Health is a physician-led health plan in New Mexico available through the commercial market for employer-sponsored health coverage and individual market as well as the Federal Employee Health Benefits Program.

Since its inception, the Company has incurred losses from operations. As of September 30, 2020, the Company had unrestricted cash and cash equivalents of $370.5 million. The Company believes it has sufficient liquidity for the next twelve months as of the date the financial statements were available to be issued.

The Company’s headquarters is located in Arlington, Virginia.

Evolent Health LLC Governance

Our operations are conducted through Evolent Health LLC and subsequent to the offering reorganization at the time of our initial public offering (the “Offering Reorganization”), the financial results of Evolent Health LLC were consolidated in the financial statements of Evolent Health, Inc. Evolent Health, Inc. is a holding company whose principal asset is all of the Class A common units it holds in Evolent Health LLC, and its only business is to act as sole managing member of Evolent Health LLC. As such, it controls Evolent Health LLC’s business and affairs and is responsible for the management of its business.

Issuances of Common Units

Evolent Health LLC may only issue Class A common units to us, as the sole managing member of Evolent Health LLC. Class B common units may be issued only to persons or entities we permit. Such issuances of Class B common units shall be made in exchange for cash or other consideration. Class B common units may not be transferred as Class B common units except to certain permitted transferees and in accordance with the restrictions on transfer set forth in the third amended and restated operating agreement of Evolent Health LLC. Any such transfer must be accompanied by the transfer of an equal number of shares of our Class B common stock. As of September 30, 2020 and December 31, 2019, there are no Class B common units outstanding.

Note 2. Basis of Presentation, Summary of Significant Accounting Policies and Change in Accounting Principle

Basis of Presentation

In our opinion, the accompanying unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to fairly state our financial position, results of operations, and cash flows. The consolidated balance sheet at December 31, 2019, has been derived from audited financial statements as of that date. The interim consolidated results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain footnote disclosures normally included in financial statements prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) have been omitted pursuant to instructions, rules, and regulations prescribed by the United States Securities and Exchange Commission (“SEC”). The disclosures provided herein should be read in conjunction with the audited financial statements and notes thereto included in our 2019 Form 10-K.

Summary of Significant Accounting Policies

Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are summarized below.

Accounting Estimates and Assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses for the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates. In the accompanying consolidated financial statements, estimates are used for, but not limited to, the valuation of assets (including intangibles and long-lived assets), liabilities, consideration related to business combinations and asset acquisitions, revenue recognition (including variable consideration), estimated selling prices for performance obligations in contracts with multiple performance obligations, reserves for claims and performance-based arrangements, credit losses, depreciable lives of assets, impairment of long-lived assets, stock-based compensation, deferred income taxes and valuation allowance, contingent liabilities, valuation of intangible assets (including goodwill), purchase price allocation in taxable stock transactions and useful lives of intangible assets.

Principles of Consolidation

The consolidated financial statements include the accounts of Evolent Health, Inc. and its subsidiaries. All intercompany accounts and transactions are eliminated in consolidation.

Operating Segments

Operating segments are defined as components of a business that may recognize revenue and incur expenses for which discrete financial information is available that is evaluated, on a regular basis, by the chief operating decision maker (“CODM”) to decide how to allocate resources and assess performance. The Company operates through two segments: (1) Services, and (2) True Health. Our Services segment consists of two clinical solutions: (i) total cost of care services and (ii) specialty care management services, and one administrative solution: comprehensive health plan administration services. Our True Health segment consists of a commercial health plan we operate in New Mexico that historically focused on small and large businesses. In 2020, True Health diversified its services to offer coverage for individuals and families as well as the Federal Employee Health Benefits Program. See Note 19 for a discussion of our operating results by segment.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments include cash and investments used to collateralize various contractual obligations (in thousands) as follows:


	September 30, 2020		December 31, 2019
Collateral for letters of credit for facility leases (1)	$	3,510	$	3,610
Collateral with financial institutions (2)	9,860		5,742
Claims processing services (3)	15,959		18,171
Other	2,118		817
Total restricted cash and restricted investments	$	31,447	$	28,340

Current restricted investments	$	100	$	704
Current restricted cash	21,885		19,376
Total current restricted cash and restricted investments	$	21,985	$	20,080

Non-current restricted investments	$	1,310	$	113
Non-current restricted cash	8,152		8,147
Total non-current restricted cash and restricted investments	$	9,462	$	8,260

(1) Represents restricted cash related to collateral for letters of credit required in conjunction with lease agreements. See Note 11 for further discussion of our lease commitments.

(2) Represents collateral held with financial institutions for risk-sharing and other arrangements. As of September 30, 2020 and December 31, 2019, approximately $0.1 million and $1.0 million, respectively, of the collateral amount was held in a trust account and invested in money market funds related to risk-sharing arrangements. The amounts invested in money market funds are considered restricted cash and are carried at fair value, which approximates cost. See Note 17 for discussion of fair value measurement and Note 10 for discussion of our risk-sharing arrangements. As of September 30, 2020 and December 31, 2019, approximately $9.7 million and $4.7 million, of the collateral amounts were held in a FDIC participating bank account, respectively.

(3) Represents cash held by the Company related to claims processing services on behalf of partners. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed.

The following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the statements of cash flows (in thousands).


	September 30,
	2020		2019
Cash and cash equivalents	$	370,514	$	96,734
Restricted cash and restricted investments	31,447		109,832
Restricted investments included in restricted cash and restricted investments	(1,410)		(813)
Total cash and cash equivalents and restricted cash shown in the consolidated statements of cash flows	$	400,551	$	205,753

Notes Receivable

Notes receivable are carried at the face amount of each note plus accrued interest receivable, less received payments. The Company does not typically carry notes receivable in the course of its regular business, but contributed $40.0 million in the form of an advance for regulatory capital requirements (the “Passport Note”) under an agreement that Passport entered into during the second quarter of 2019. The Passport Note carried a fixed interest rate of 6.5% per annum and is required to be repaid, plus accrued interest, in a single payment on July 1, 2025, the maturity date, or earlier, subject to regulatory approval. The Passport Note is required to be repaid out of the surplus in excess of Passport’s obligations to its policyholders, claimant and beneficiary claims and all other creditors. Upon the consolidation of Passport discussed in Note 4, the Passport Note was eliminated. As of September 30, 2020, the outstanding principal balance of the Passport Note was $40.0 million, excluding approximately $3.3 million of accrued interest.

Business Combinations

Companies acquired during each reporting period are reflected in the results of the Company effective from their respective dates of acquisition through the end of the reporting period. The Company allocates the fair value of purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Critical estimates used to value certain identifiable assets include, but are not limited to, expected long-term revenues, future expected operating expenses, cost of capital, and appropriate discount rates.

The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed in the acquired entity is recorded as goodwill. Goodwill is assigned to the reporting unit that benefits from the synergies arising from the business combination. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded on the Company's consolidated statements of operations and comprehensive income (loss).

For contingent consideration recorded as a liability, the Company initially measures the amount at fair value as of the acquisition date and adjusts the liability, if needed, to fair value at each reporting period. Changes in the fair value of contingent consideration, other than measurement period adjustments, are recognized as operating income or expense. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.

Equity Method Investments

For entities that are not consolidated, but where the Company has significant influence over the operating or financial decisions of the entity, the Company accounts for the investment under the equity method of accounting. In accordance with the equity method of accounting, the Company will recognize its share of earnings or losses of the investee in the period in which they are reported by the investee. The Company also considers whether there are any indicators of other-than-temporary impairment of its investments accounted for under the equity method. These investments are included in investments in and advances to equity method investees on the consolidated balance sheets with income or loss included in loss from equity method investees on the consolidated statements of operations and comprehensive income (loss).

Impairment of Equity Method Investments

The Company considers certain factors to determine if there is a decrease in its investment value for its equity method investments that is other than temporary. The equity method investments will be written down to fair value if there is evidence of a loss in value which is other-than-temporary. The Company may estimate the fair value of its equity method investments by considering recent investee equity transactions, discounted cash flow analysis and recent operating results. If the fair value of the investment is below the carrying amount, management considers several factors when determining whether other-than-temporary impairment has occurred. The estimation of fair value and whether other-than-temporary impairment has occurred requires the application of significant judgment

and future results may vary from current assumptions. Refer to Note 15 for additional discussion regarding impairments on equity method investments.

Goodwill

We recognize the excess of the purchase price, plus the fair value of any non-controlling interests in the acquiree, over the fair value of identifiable net assets acquired as goodwill. Goodwill is not amortized, but is reviewed at least annually for indications of impairment, with consideration given to financial performance and other relevant factors. We perform impairment tests of goodwill at a reporting unit level, which is consistent with the way management evaluates our business. The Company has four reporting units and our annual goodwill impairment review occurs during the fourth quarter of each year. We perform impairment tests between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in goodwill impairment on our consolidated statements of operations and comprehensive income (loss). See Note 8 for additional discussion regarding the goodwill impairment tests conducted during the nine months ended September 30, 2020 and the year ended December 31, 2019.

Intangible Assets, Net

Identified intangible assets are recorded at their estimated fair values at the date of acquisition and are amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are used.

The following summarizes the estimated useful lives by asset classification:


Corporate trade name			10 - 20 years
Customer relationships			10 - 25 years
Technology			5 years
Provider network contracts			4 - 5 years

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the asset’s carrying value. The Company evaluates recoverability by determining whether the undiscounted cash flows expected to result from the use and eventual disposition of that asset or group exceed the carrying value at the evaluation date. If the undiscounted cash flows are not sufficient to cover the carrying value, the Company measures an impairment loss as the excess of the carrying amount of the long-lived asset or group over its fair value. See Note 8 for additional discussion regarding our intangible assets.

Reserves for Claims and Performance-based Arrangements

Reserves for performance-based arrangements and claims for our Services and True Health segments reflect estimates of payments under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care professionals and facilities. Reserves for claims and performance-based arrangements also reflect estimated amounts owed to NMHC under a reinsurance agreement for 2019 as discussed further in Note 10. The reinsurance agreement was terminated in December 2019. The Company uses actuarial principles and assumptions that are consistently applied in each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

The process of estimating reserves involves a considerable degree of judgment by the Company and, as of any given date, is inherently uncertain. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and adjustments are reflected in current results of operations in the period in which they are identified as experience develops or new information becomes known. See Note 20 for additional discussion regarding our reserves for claims and performance-based arrangements.

Leases

As discussed in Note 3, we adopted Accounting Standards Update (“ASU”) 2016-02 effective January 1, 2019. The following reflects our updated policy for leases.

The Company enters into various office space, data center, and equipment lease agreements in conducting its normal business operations. At the inception of any contract, the Company evaluates the agreement to determine whether the contract contains a lease. If the contract contains a lease, the Company then evaluates the term and whether the lease is an operating or finance lease. Most leases include one or more options to renew or may have a termination option. The Company determines whether these options are reasonably certain to be exercised at the inception of the lease. The rent expense is recognized on a straight-line basis in the consolidated statements of operations and comprehensive income (loss) over the terms of the respective leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

The Company also enters into sublease agreements for some of its leased office space. Rental income attributable to subleases is immaterial and is offset against rent expense over the terms of the respective leases.

Refer to Note 11 for additional lease disclosures.

Revenue Recognition

Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services. Transformation services consist of implementation services whereby we assist the customer in launching its population health or health plan programs, or implement certain platform and operations services. In certain cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for clients who are exiting a line of business or population. Platform and operations services generally include multi-year arrangements with customers to provide various population health, health plan operations, specialty care management and claims processing services on an ongoing basis, as well as transition or run-out services to customers receiving primarily third-party administration (“TPA”) services. Revenue is recognized when control of the services is transferred to our customers.

We use the following 5-step model, outlined in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), to determine revenue recognition for our Services segment from our contracts with customers:

• Identify the contract(s) with a customer

• Identify the performance obligations in the contract

• Determine the transaction price

• Allocate the transaction price to performance obligations

• Recognize revenue when (or as) the entity satisfies a performance obligation

Our True Health segment derives revenue from premiums that are earned over the terms of the related insurance policies. True Health also derived revenue in 2019 from reinsurance premiums assumed from NMHC under the terms of the reinsurance agreement (as defined in Note 10). The portion of premiums that will be earned in the future or are received prior to the effectiveness of the policy are deferred and reported as premiums received in advance. These amounts are generally classified as deferred revenue on our consolidated balance sheets.

See Note 5 for further discussion of our policies related to revenue recognition.

Foreign Currency

The Company formed a subsidiary in India during the first quarter of 2018. The functional currency of our international subsidiary is the Indian Rupee. We translate the financial statements of this subsidiary to U.S. dollars using month-end rates of exchange for assets and liabilities, and monthly average rates of exchange for revenue and expenses. Translation gains and losses are recorded in accumulated other comprehensive income (loss) as a component of shareholders' equity. Foreign currency translation gains and losses did not have a material impact on our consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019.

Note 3. Recently Issued Accounting Standards

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases, in order to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This update introduces a new standard on accounting for leases, including a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU 2018-11, which is intended to make targeted improvements to ASU 2016-02. The amendments in ASU 2018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard using an effective date method rather than the earliest comparative period. The requirements of ASU 2018-11 are effective on the same date as the requirements of ASU 2016-02. We adopted ASU 2016-02 as of January 1, 2019, using the modified retrospective approach. Further, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional right-of-use assets and lease liabilities of approximately $51.4 million and $47.4 million, respectively, on our consolidated balance sheet as of January 1, 2019. The standard had no impact on our results of operations.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Services Contract. The amendments in this ASU align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We adopted the requirements of ASU 2018-15 effective January 1, 2019. There was no material impact to our consolidated balance sheets or results of operations as of or for the year ended December 31, 2019.

In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization and Miscellaneous Updates (SEC Update). ASU 2019-07 clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC’s regulations, thereby eliminating redundancies and making the codification easier to apply. The disclosure and presentation amendments included in ASU 2019-07, which were effective upon issuance of the standard and were to be applied prospectively, did not have a material impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequently issued additional guidance that modified ASU 2016-13. The standard requires an entity to change its accounting approach for measuring and recognizing credit losses on certain financial assets measured at amortized cost, including trade receivables, certain non-trade receivables, contract assets, held-to-maturity securities, customer advances and certain off-balance sheet credit exposures, by replacing the existing “incurred loss” framework with an expected credit loss recognition model. The new standard results in earlier recognition of credit losses based on past events, current conditions, and reasonable and supportable forecasts. The standard is effective for entities with fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. We adopted the requirements of this standard effective January 1, 2020 using the modified retrospective approach and recorded a cumulative effect adjustment of $3.0 million to January 1, 2020 retained earnings (accumulated deficit). Results for reporting periods beginning January 1, 2020 reflect the adoption of ASU 2016-13, while prior period amounts were not adjusted and continue to be reported in accordance with our historical accounting practices. In our previous accounting policy for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based solely on specific identification. Under the new accounting standard, we maintain our specific identification process but utilize several factors to develop historical losses reserves, including aging schedules, customer creditworthiness, and historical payment experience, which are then adjusted for current conditions and reasonable and supportable forecasts in measurement of the allowance. In addition, for customer advances and certain off-balance sheet credit exposures, we evaluate the allowance through a discounted cash flow approach. For held-to-maturity investment securities, we evaluate (i) historical information adjusted for current conditions and reasonable and supportable forecasts and (ii) qualitative factors to determine whether the zero-loss expectation exception applies. Refer to Note 6 for additional disclosures related to current expected credit losses.

In August 2018, the FASB issued ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 amends Topic 820 to add, remove, and clarify disclosure requirements related to fair value measurement disclosures. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. We adopted the

requirements of this standard effective January 1, 2020 and determined it did not have a material impact on our consolidated financial statements and related disclosures.

Note 4. Transactions

Equity Investments

Passport

On December 30, 2019, University Health Care, Inc. (“UHC”), Passport Health Solutions, LLC, a Kentucky nonprofit limited liability company and subsidiary of UHC (“PHS I”), the Company and Justify Holdings, Inc., a Kentucky corporation and a previous subsidiary of the Company (the “Passport Buyer”), closed a transaction whereby Passport Buyer acquired substantially all of the assets and assumed substantially all of the liabilities of UHC and PHS I for $70.0 million in cash and issued a 30% equity interest in the Passport Buyer to the following provider sponsors of UHC: the University of Louisville, the University of Louisville Physicians, the University Medical Center, the Jewish Heritage Fund for Excellence, Norton Healthcare, Inc. and the Louisville/Jefferson County Primary Care Association (collectively, the “Sponsors”). As of December 30, 2019, Justify Holdings, Inc. became Passport Health Plan, Inc. (“Passport”) $16.2 million of the cash consideration was placed in escrow until such time as PHS I delivers to Passport Buyer certain owned real property and improvements. During the three months ended June 30, 2020, Passport Buyer did not meet certain statutory capital thresholds as a result of the owned real property and improvements not being transferred and $16.2 million was released from escrow and returned to the Passport Buyer. If the transfer of owned real property and improvements does not occur by December 31, 2020, then Passport Buyer and PHS I will mutually agree to dispose and/or transfer the owned real property and improvements.

On July 16, 2020, Evolent Health LLC, a Delaware limited liability company and wholly owned subsidiary of the Company, and Passport which is owned 70% by EH Holding Company, Inc., a wholly owned subsidiary of Evolent Health LLC (“EH Holding Company”) and 30% by the Sponsors, entered into an Asset Purchase Agreement (the “Molina APA”) with Molina Healthcare, Inc., a Delaware corporation (“Molina”), which contemplated the sale by Passport to Molina (or its permitted affiliate assignee) of certain assets, including certain intellectual property rights of Passport and Passport’s rights under its existing Medicaid contract with the Kentucky Cabinet for Health and Family Services (the “Medicaid Contract”).

On September 1, 2020, Passport and Molina completed the closing of the transactions contemplated by the Molina APA, and Passport’s Medicaid Contract was novated to Molina (the “Closing”). As a result, Passport began to wind down its business. In connection with the Closing, Molina deposited $20.0 million in cash in escrow, which is expected to be released to Passport on January 1, 2021. Prior to this transaction, the Company previously accounted for its investment in Passport as an unconsolidated variable interest entity under the equity method of accounting. As a result of the transaction, the Company concluded that a reconsideration event occurred whereby Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in Passport; accordingly, the Company consolidated Passport as of September 1, 2020 in its consolidated financial statements. The Company accounted for the transaction as an asset acquisition, as the set of assets acquired as a result of the consolidation did not meet the criteria to be classified as a business under GAAP.

As part of the consolidation, the Company recorded assets primarily consisting of cash and cash equivalents and restricted cash and cash equivalents of $159.8 million, available for sale securities of $88.6 million, receivables related to unsettled sales of securities of $43.0 million and other assets of $50.2 million and total liabilities primarily comprised of reserve for claims and performance-based arrangements of $164.8 million and accrued liabilities of $50.0 million. Subsequent to winddown activities, any remaining cash will be distributed to the Company subject to regulatory approval from the Kentucky Department of Insurance.

On June 18, 2019, we contributed the Passport Note under an agreement with Passport. The Passport Note carries a fixed interest rate of 6.5% per annum and is required to be repaid, plus accrued interest, in a single payment on July 1, 2025, the maturity date, or earlier, subject to regulatory approval. The Passport Note is required to be repaid out of surplus in excess of Passport’s obligations to its policyholders, claimant and beneficiary claims and all other creditors. The Passport Note was eliminated upon consolidation, effective September 1, 2020.

On June 6, 2019, the Company and Passport entered into an Indemnity Agreement (the “Indemnity Agreement”), with an insurance company (the “Surety”). The Surety issued a performance bond in the amount of $25.0 million to secure Passport’s performance under its Medicaid Contract. Pursuant to the Indemnity Agreement, the Company and Passport are jointly and severally liable to the Surety in the maximum amount of the bond, plus certain costs of the Surety, in the event of losses arising under the bond. The bond’s original expiry date was June 30, 2020 and during the three months ended June 30, 2020, was extended to December 31, 2020. In connection with the consummation of the transactions, the Sponsors, the Passport Buyer and a subsidiary of the Company entered into a shareholders’ agreement that provides for the governance of the Passport Buyer following the closing, and certain other rights between the parties thereto.

Loss on Disposal of Assets

During 2019, the Company, through a consolidated subsidiary, entered into an agreement with an unrelated party to provide services and support to providers, independent physician associations, and other provider groups. During the first quarter of 2020, the Company sold its interest in the subsidiary and recorded a loss on disposal of assets of $6.4 million. The Company did not have any continuing involvement with the subsidiary after the consummation of this transaction.

Note 5. Revenue Recognition

Our Services segment derives revenue from two sources: (1) transformation services and (2) platform and operations services.

Transformation Services Revenue

Transformation services consist of implementation services whereby we assist the customer in launching its population health or health plan programs. In certain cases, transformation services can also include revenue associated with our support of certain one-time wind-down activities for clients who are exiting a line of business or population. The transformation services are usually completed within 12 months. We generally receive a fixed fee for transformation services and recognize revenue over time using an input method based on hours incurred compared to the total estimated hours required to satisfy our performance obligation.

Platform and Operations Services Revenue

Platform and operations services are typically multi-year arrangements with customers to provide various clinical and administrative solutions. Our clinical solutions are designed to lower the medical expenses of our partners and include our total cost of care and specialty care management services; our administrative solutions are designed to provide comprehensive health plan operations and claims processing services, and also include transition or run-out services to customers receiving primarily TPA services. Contracts to provide these services may be developed on an integrated basis. For purposes of revenue disaggregation, we classify contracts including both clinical and administrative solutions into the category corresponding to the majority of services provided under those contracts.

Our performance obligation in these arrangements is to provide an integrated suite of services, including access to our platform that is customized to meet the specialized needs of our customers and members. Generally, we will apply the series guidance to the performance obligation as we have determined that each time increment is distinct. We primarily utilize a variable fee structure for these services that typically includes a monthly payment that is calculated based on a specified per member per month rate, multiplied by the number of members that our partners are managing under a value-based care arrangement or a percentage of plan premiums. Our arrangements may also include other variable fees related to service level agreements, shared medical savings arrangements and other performance measures. Variable consideration is estimated using the most likely amount based on our historical experience and best judgment at the time. Due to the nature of our arrangements, certain estimates may be constrained if it is probable that a significant reversal of revenue will occur when the uncertainty is resolved. We recognize revenue from platform and operations services over time using the time elapsed output method. Fixed consideration is recognized ratably over the contract term. In accordance with the series guidance, we allocate variable consideration to the period to which the fees relate.

Contracts with Multiple Performance Obligations

Our contracts with customers may contain multiple performance obligations, primarily when the customer has requested both transformation services and platform and operations services as these services are distinct from one another. When a contract has multiple performance obligations, we allocate the transaction price to each performance obligation based on the relative standalone selling price using the expected cost margin approach. This approach requires estimates regarding both the level of effort it will take to satisfy the performance obligation as well as fees that will be received under the variable pricing model. We also take into consideration customer demographics, current market conditions, the scope of services and our overall pricing strategy and objectives when determining the standalone selling price.

Principal vs. Agent

We occasionally use third parties to assist in satisfying our performance obligations. In order to determine whether we are the principal or agent in the arrangement, we review each third-party relationship on a contract by contract basis. We are an agent when our role is to arrange for another entity to provide the services to the customer. In these instances, we do not control the service before it is provided and recognize revenue on a net basis. We are the principal when we control the good or service prior to transferring control to the customer. We recognize revenue on a gross basis when we are the principal in the arrangement.

Disaggregation of Revenue

The following table represents Evolent’s Services segment revenue disaggregated by type of services (in thousands), excluding revenues from our health plan operations, which include the True Health segment and Passport, and from our downside risk sharing arrangements through our insurance subsidiary, which are accounted for under ASC 944, Financial Services-Insurance.


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Services Revenue
Transformation services	$	4,807	$	5,184	$	10,800	$	10,481
Platform and operations services
Clinical solutions	181,077		121,323		502,659		312,527
Administrative solutions	49,184		49,676		149,800		149,359

Transaction Price Allocated to the Remaining Performance Obligations

For contracts with a term greater than one year, we have allocated approximately $90.3 million of transaction price to performance obligations that are unsatisfied as of September 30, 2020. We do not include variable consideration that is allocated entirely to a wholly unsatisfied performance obligation accounted for under the series guidance in the calculation. As a result, the balance represents the value of the fixed consideration in our long-term contracts that we expect will be recognized as revenue in a future period and excludes the majority of our platform and operations revenue, which is primarily derived based on variable consideration as discussed in Note 2. We expect to recognize revenue on approximately 19% and 63% of these remaining performance obligations by December 31, 2020, and December 31, 2021, respectively, with the remaining balance to be recognized thereafter. However, because our existing contracts may be canceled or renegotiated including for reasons outside our control, the amount of revenue that we actually receive may be less or greater than this estimate and the timing of recognition may not be as expected.

Contract Balances

Contract balances consist of accounts receivable, contract assets and deferred revenue. Contract assets are recorded when the right to consideration for services is conditional on something other than the passage of time. Contract assets relating to unbilled receivables are transferred to accounts receivable when the right to consideration becomes unconditional. We classify contract assets as current or non-current based on the timing of our rights to the unconditional payments. Our contract assets are generally classified as current and recorded within contract assets on our consolidated balance sheets. Our current accounts receivables are classified within accounts receivable, net on our consolidated balance sheets and our non-current accounts receivable are classified within prepaid expenses and other non-current assets on our consolidated balance sheets.

Deferred revenue includes advance customer payments and billings in excess of revenue recognized. We classify deferred revenue as current or non-current based on the timing of when we expect to recognize revenue. Our current deferred revenue is recorded within deferred revenue on our consolidated balance sheets, and non-current deferred revenue is recorded within other long-term liabilities on our consolidated balance sheets.

The following table provides information about receivables, contract assets and deferred revenue from contracts with customers (in thousands):


	September 30, 2020		December 31, 2019
Short-term receivables (1)	$	92,479	$	71,707
Long-term receivables (1)	4,473		709
Short-term contract assets	671		1,751
Long-term contract assets	—		999
Short-term deferred revenue	12,459		19,828
Long-term deferred revenue	2,520		1,330

(1) Excludes pharmacy claims receivable and premiums receivable

Changes in contract assets and deferred revenue for the nine months ended September 30, 2020, are as follows (in thousands):


Contract assets
Balance as of beginning-of-period	$	2,750
Reclassification to receivables, as the right to consideration becomes unconditional	(2,198)
Contract assets recognized, net of reclassification to receivables	119
Balance as of end-of-period	$	671

Deferred revenue
Balance as of beginning-of-period	$	21,158
Reclassification to revenue, as a result of performance obligations satisfied	(17,422)
Cash received in advance of satisfaction of performance obligations	11,243
Balance as of end-of-period	$	14,979

The amount of revenue recognized from performance obligations satisfied (or partially satisfied) in previous period was $3.6 million and $11.3 million during the three and nine months ended September 30, 2020, due primarily to net gain share as well as changes in other estimates.

Contract Cost Assets

Certain bonuses and commissions earned by our sales team are considered incremental costs of obtaining a contract with a customer that we expect to be recoverable. The capitalized contract acquisition costs are classified as non-current assets and recorded within contract cost assets on our consolidated balance sheets. Amortization expense is recorded within selling, general and administrative expenses on the accompanying consolidated statements of operations and comprehensive income (loss). As of September 30, 2020 and December 31, 2019, the Company had $3.6 million and $4.7 million, respectively, of contract acquisition cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization expense of $0.4 million and $1.3 million for the three and nine months ended September 30, 2020, respectively, and $0.3 million and $0.5 million for the three and nine months ended September 30, 2019.

In our platforms and operations arrangements, we incur certain costs related to the implementation of our platform before we begin to satisfy our performance obligation to the customer. The costs, which we expect to recover, are considered costs to fulfill a contract. Our contract fulfillment costs primarily include our employee labor costs and third-party vendor costs. The capitalized contract fulfillment costs are classified as non-current and recorded within contract cost assets on our consolidated balance sheets. Amortization expense is recorded within cost of revenue on the accompanying consolidated statements of operations and comprehensive income (loss). As of September 30, 2020 and December 31, 2019, the Company had $24.9 million and $31.8 million, respectively, of contract fulfillment cost assets, net of accumulated amortization recorded in contract cost assets on the consolidated balance sheets. In addition, the Company recorded amortization expense of $5.2 million and $14.6 million for the three and nine months ended September 30, 2020, respectively, and $1.1 million and $3.7 million for the three and nine months ended September 30, 2019.

These costs are deferred and then amortized on a straight-line basis over a period of benefit that we have determined to be five years. The period of benefit was based on our technology, the nature of our customer arrangements and other factors.

Note 6. Credit Losses

We are exposed to credit losses primarily through our accounts receivable from revenue transactions, investments held at amortized cost and customer advance for regulatory capital and other notes receivable. We estimate expected credit losses based on past events, current conditions and reasonable and supportable forecasts. Expected credit losses are measured over the remaining contractual life of these assets. As part of our consideration of current and forward-looking economic conditions, we considered the impact of the COVID-19 pandemic on our customers’ and other third parties’ ability to pay. We did not observe notable increases in delinquencies during the three and nine month periods ended September 30, 2020. Given the nature of our business, our past collection experience during recessionary and pre-recessionary periods, and our forecasted impact of the COVID-19 pandemic on our business, we did not record material changes in our allowances due to the COVID-19 pandemic during the three and nine month periods ended September 30, 2020.

Accounts Receivable from Revenue Transactions

Accounts receivable represent the amounts owed to the Company for goods or services provided to customers or third parties. Current accounts receivables are classified within accounts receivable, net on the Company’s consolidated balance sheets, while non-current accounts receivables are classified within prepaid expenses and other noncurrent assets on the Company’s consolidated balance sheets.

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms, due dates and business strategy. Our activities include timely account reconciliation, dispute resolution and payment confirmation. We may employ legal counsel to pursue recovery of defaulted receivables. In addition, the Company will establish a general reserve based on delinquency rates. Historical loss rates are determined for each delinquency bucket in 30-day past-due intervals, and then applied to the composition of the reporting date balance based on delinquency. The allowance implied from application of the historical loss rates is then adjusted, as necessary, for current conditions and reasonable and supportable forecasts.

Based on an aging analysis of our trade accounts receivable, non-trade accounts receivable and contract assets at September 30, 2020, 64% were current, 30% were past due less than 60 days, with 34% past due less than 120 days. At September 30, 2020, we reported $137.6 million of accounts receivable, certain non-trade accounts receivable included in prepaids and other assets on the consolidated balance sheet and contract assets, net of allowances of $5.2 million. The following table summarizes the changes in allowance for credit losses on our accounts receivables, certain non-trade accounts receivable and contract assets for the nine months ended September 30, 2020 (in thousands):


	For the Nine Months Ended September 30, 2020
Balance as of December 31, 2019	$	(41)
Passport acquisition	(2,582)
Cumulative transition adjustment	(2,815)
Provision for credit losses	(1,438)
Charge-offs	1,665
Balance as of September 30, 2020	$	(5,211)

Investments Held at Amortized Cost

True Health invests in certain debt securities which are classified as held-to-maturity in Evolent’s consolidated financial statements because True Health, as Evolent’s wholly-owned subsidiary, has the intent and ability to hold the securities until their individual maturities. True Health invests in debt securities pursuant to an investment policy governing the nature and type of investments based on the Company’s business strategy, risk tolerance, and investment objectives.

The amortized cost of our investments as of September 30, 2020 and December 31, 2019 (in thousands) and interest income for the three and nine months ended September 30, 2020 were as follows:


	Amortized Cost				Interest Income for the Three Months Ended September 30,				Interest Income for the Nine Months Ended September 30,
	September 30, 2020		December 31, 2019		2020		2019		2020		2019
U.S. Treasury bills	$	8,920	$	10,784	$	59	$	64	$	181	$	183
Corporate bonds	1,708		1,705		471		14		500		34
Collateralized mortgage obligations	5,164		5,472		197		34		301		63
Corporate stock	130		—		—		—		—		—
Yankees	597		597		5		5		16		16
Total investments	$	16,519	$	18,558	$	732	$	117	$	998	$	296

The Company reviewed its held-to-maturity investments to determine which types of securities have zero risk of credit loss because payments are guaranteed by a third party. Based on this analysis, the Company determined that the expected credit losses on U.S. Treasury bills and mortgage backed securities from government sponsored enterprise (“GSE”) is zero. The expected credit losses on non-GSE backed securities is considered immaterial.

As of September 30, 2020, all of the Company’s held-to-maturity investments were rated investment-grade or better and all payments of interest or principal are current.

Notes Receivable

On September 30, 2019, we entered into an amended agreement with an equity method investee to reduce our maximum funding for operations to $5.0 million (the “Note”) through a line of credit. The Note carries a fixed interest rate of 6.5% per annum and is required to be repaid, plus accrued interest, in monthly payments beginning April 30, 2019 through the note end date of April 1, 2030. As of September 30, 2020 and December 31, 2019, the equity method investee had drawn $1.4 million and $1.0 million under this Note, respectively. The Company recorded the Note at amortized cost basis, including accrued interest, on the consolidated balance sheets and reports principal in prepaid expenses and other non-current assets, net and accrued interest in prepaid expenses and other current assets, net. The remaining undrawn amount is an off-balance sheet credit commitment which is subject to measurement because the Company does not have the ability to rescind its commitment to extend this credit unconditionally. The allowance associated with the undrawn amounts is recorded in other long-term liabilities on the consolidated balance sheets and will be reclassified from other long-term liabilities to prepaid expenses and other non-current assets on the consolidated balance sheets as the Note is drawn.

Evolent evaluated this note and employed a probability of default and loss given default framework which relies on contractual cash flows to determine the exposure at default at any point in the future. The model calculates contractual cash flows for all remaining periods of the note’s contractual life based on terms of the notes and utilize the amortization principles set forth within those terms under the assumption that the note will behave as expected under the contract. Forecasted probability of default rates and loss given default rates are applied in each future contractual period to determine the period-specific amount of default and the associated loss given that default has occurred.

The probability of default assumption relies upon a set maximum period-specific rate which is derived based upon historical peer-institution loss experience. The loss given default rate for the Note is assumed to be 50% in every period. This assumption relies upon a 50/50 expectation of a good outcome versus a bad outcome given a default event’s occurrence. Under a good outcome, the Company would achieve a 100% recovery of the defaulted balance whereas under a bad outcome the Company would recover 0% of the defaulted balance.

At September 30, 2020, we reported $1.4 million of notes receivable, net of immaterial allowances on drawn principal in prepaid expenses and other non-current assets on the consolidated balance sheets. The Florida Agency for Healthcare Administration (the “Agency”) reviews requests for payments on a quarterly basis and will only approve the requests when it is satisfied that any repayment will not be reasonably likely to cause the borrower to be unable to meet its insolvency or surplus requirements. Circumstances under which the Agency will approve repayment include, but are not limited to, when the Premium to Surplus ratio is 10 to 1 or below. While the Company is currently accruing interest on the Note, it may stop accruing interest in the future if the Note borrower is in default of either principal or interest payments.

Note 7. Property and Equipment, Net

The following summarizes our property and equipment (in thousands):


	September 30, 2020		December 31, 2019
Computer hardware	$	18,305	$	11,604
Furniture and equipment	4,359		3,649
Internal-use software development costs	131,830		112,501
Leasehold improvements	15,957		12,415
Total property and equipment	170,451		140,169
Accumulated depreciation and amortization expenses	(82,379)		(55,014)
Total property and equipment, net	$	88,072	$	85,155

The Company capitalized $5.6 million and $19.3 million of internal-use software development costs for the three and nine months ended September 30, 2020, respectively and $8.1 million and $25.0 million for the three and nine months ended September 30, 2019, respectively. The net book value of capitalized internal-use software development costs was $76.4 million and $74.9 million as of September 30, 2020 and December 31, 2019, respectively.

Depreciation expense related to property and equipment was $7.3 million and $21.2 million for the three and nine months ended September 30, 2020, respectively, of which amortization expense related to capitalized internal-use software development costs was

$6.2 million and $17.8 million, respectively. Depreciation expense related to property and equipment was $6 million and $16.9 million for the three and nine months ended September 30, 2019, respectively, of which $4.9 million and $13.5 million amortization expense related to capitalized internal-use software development costs.

Note 8. Goodwill and Intangible Assets, Net

Goodwill

Goodwill has an estimated indefinite life and is not amortized; rather, it is reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.

The Company has four reporting units, each a discrete legal entities with discrete full financial statements. Our assets and liabilities are employed in and relate to the operations of our reporting units. Therefore, the equity carrying value and future cash flows must be estimated each time a goodwill impairment analysis is performed on a reporting unit. As a result, our assets, liabilities and cash flows are assigned to reporting units using reasonable and consistent allocation methodologies.

Our annual goodwill impairment review occurs during the fourth quarter of each fiscal year. We evaluate qualitative factors that could cause us to believe the estimated fair value of each of our reporting units may be lower than the carrying value and trigger a quantitative assessment, including, but not limited to (i) macroeconomic conditions, (ii) industry and market considerations, (iii) our overall financial performance, including an analysis of our current and projected cash flows, revenues and earnings, (iv) a sustained decrease in share price and (v) other relevant entity-specific events including changes in management, strategy, partners, or litigation.

2019 Goodwill Impairment Test

During the second half of 2019, the price of our Class A common stock declined significantly. The average closing price per share of our Class A common stock for the period from May 1 to October 31 decreased by $6.59 per common share, or 43.5%, compared to the average closing price for the period from January 1 to April 30. In addition, it was not certain that Passport would be awarded a Kentucky managed Medicaid contract for the next contract period, which was expected to begin on January 1, 2021. Since Passport was not awarded a contract under the RFP, we expect that we will not receive any material revenue under our management services agreement from Passport Buyer subsequent to December 31, 2020 and the value of our investment in Passport and goodwill will be negatively impacted. The non-renewal of Passport’s contract would reduce our medium-term cash flow projections for one of our reporting units, causing the decline in our stock price to possibly be further prolonged, indicating it is more likely than not that that the fair value of the reporting units is less than the reporting unit’s carrying amounts, triggering an interim quantitative assessment.

In performing our October 31, 2019 impairment test, we estimated the fair value of our reporting units by considering a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value using the income approach, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments, including about revenues, expenses, fixed asset and working capital requirements, the timing of exchanges of our Class B common shares, capital market assumptions, cash flows, the probability of the Passport RFP outcome and discount rates. The fair values determined by the income approach, as described above, were weighted considering future resolution of the Passport RFP result to determine the concluded fair value for each reporting unit. If the probability of Passport being awarded a contract under the RFP increases, it is unlikely to result in a future impairment charge ignoring other events or circumstances, however, if the probability of Passport being awarded a contract under the RFP decreases, we will likely have a future impairment charge.

As of October 31, 2019, we determined that one of our three reporting units in the Services segment had an estimated fair value less than its carrying value. As a result, we recorded a non-cash goodwill impairment charge of $199.8 million in goodwill impairment on our consolidated statements of operations and comprehensive income (loss) for the year ended December 31, 2019. If other indications of impairment exist we may be required to recognize additional impairments in the future as a result of market conditions or other factors related to our performance, including changes in our forecasted results, investment strategy, interest rates or assumptions used as part of the goodwill impairment analysis. Any further impairment charges that we may record in the future could be material to our results of operations. As of December 31 2019, the remaining goodwill attributable to the reporting unit from which we recognized a non-cash goodwill impairment charge for the year ended December 31, 2019 was $431.7 million.

2020 Goodwill Impairment Analysis

As of March 31, 2020, the Company assessed whether there were additional events or changes in circumstances since its annual goodwill impairment test that would indicate that it was more likely than not that the fair value of the reporting units was less than the reporting unit’s carrying amounts that would require an additional interim impairment assessment after October 31, 2019. Considering the sharp decrease in the share price of the Company’s Class A common stock during the three months ended March 31, 2020, the Company determined indicators of an impairment were present and we performed an interim goodwill impairment assessment as of March 31, 2020. As a result of this test, the Company determined that there was no goodwill impairment of the reporting unit which recognized an impairment in the year ended December 31, 2019.

During May 2020, the CHFS announced that Passport was not awarded a Kentucky managed Medicaid contract for the next contract period and its Medicaid contract with the CHFS will expire on December 31, 2020. As a result of this announcement, the Company determined there were events or changes in circumstances since its annual goodwill impairment test that would indicate it was more likely than not that the fair value of one of its three reporting units in the Services segment was less than the reporting unit’s carrying amounts.

In performing our interim goodwill impairment analysis, we estimated the fair value of the reporting unit by considering a discounted cash flow valuation approach (“income approach”). In determining the estimated fair value, we projected future cash flows based on management’s estimates and long-term plans and applied a discount rate based on the Company’s weighted average cost of capital. This analysis required us to make judgments about revenues, expenses, fixed asset and working capital requirements, capital market assumptions, cash flows and discount rates.

As of May 31, 2020, we determined that the reporting unit under review had an estimated fair value less than its carrying value. As a result, we recorded a non-cash goodwill impairment charge of $215.1 million on our consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 30, 2020. In addition, the Company reviewed its interim goodwill impairment analysis as of June 30, 2020 and did not identify any additional information or events that would contradict or change the conclusion reached by the Company as of May 31, 2020.

During the three months ended September 30, 2020, we evaluated qualitative factors that could indicate the fair value of each of our reporting units may be lower than the carrying value. We did not identify any qualitative factors that would trigger a quantitative goodwill impairment test during the three months ended September 30, 2020. As of September 30, 2020, the remaining goodwill attributable to the reporting unit from which we recognized a non-cash goodwill impairment charge for the nine months ended September 30, 2020 was $214.3 million.

The following table summarizes the changes in the carrying amount of goodwill, by reportable segment, for the periods presented (in thousands):


	For the Nine Months Ended September 30, 2020
	Services		True Health		Consolidated
Balance as of December 31, 2019 (1)	$	566,359	$	5,705	$	572,064
Goodwill disposal (2)	(2,200)		—		(2,200)
Impairment	(215,100)		—		(215,100)
Foreign currency translation	(42)		—		(42)
Balance as of September 30, 2020 (1)	$	349,017	$	5,705	$	354,722


	For the Year Ended December 31, 2019
	Services		True Health		Consolidated
Balance as of December 31, 2018	$	762,419	$	5,705	$	768,124
Goodwill acquired	3,416		—		3,416
Measurement period adjustments	351		—		351
Impairment	(199,800)		—		(199,800)
Foreign currency translation	(27)		—		(27)
Balance as of December 31, 2019	$	566,359	$	5,705	$	572,064

(1) Net of cumulative inception to date impairment of $575.5 million and $360.4 million as of September 30, 2020 and December 31, 2019, respectively.

(2) Goodwill impaired on disposal of a consolidated subsidiary.

Intangible Assets, Net

Details of our intangible assets (in thousands, except weighted average useful lives) are presented below:


	September 30, 2020							December 31, 2019
	Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value		Weighted- Average Remaining Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Value
Corporate trade name	13.4	$	23,300	$	5,926	$	17,374	14.2	$	23,300	$	4,891	$	18,409
Customer relationships	16.4	281,219		54,622		226,597		16.8	291,519		44,750		246,769
Technology	2.1	82,922		60,855		22,067		2.0	82,922		49,760		33,162
Below market lease, net	2.6	1,118		599		519		2.2	2,048		1,334		714
Provider network contracts	3.0	14,475		5,540		8,935		3.7	12,725		3,320		9,405
Total intangible assets, net		$	403,034	$	127,542	$	275,492		$	412,514	$	104,055	$	308,459

Amortization expense related to intangible assets was $7.4 million and $25.4 million for the three and nine months ended September 30, 2020, respectively. Amortization expense related to intangible assets was $9.4 million and $28.1 million, for the three and nine months ended September 30, 2019, respectively.

Future estimated amortization of intangible assets (in thousands) as of September 30, 2020, is as follows:


2020	$	7,421
2021	28,701
2022	24,819
2023	22,055
2024	16,171
Thereafter	176,325
Total future amortization of intangible assets	$	275,492

Intangible assets are reviewed for impairment if circumstances indicate the Company may not be able to recover the assets’ carrying value. We did not identify any circumstances during three months ended September 30, 2020, that would require an impairment test for our intangible assets.

Note 9. Long-term Debt

2024 Notes

In August 2020, the Company issued $117.1 million aggregate principal amount of its 3.50% Convertible Senior Notes due 2024 (the “2024 Notes”) in privately negotiated exchange and/or subscription agreements, with certain holders of its outstanding 2021 Notes and certain new investor. The Company issued $84.2 million aggregate principal amount of 2024 Notes in exchange for $84.2 million aggregate principal amount of the 2021 Notes and an aggregate cash payment of $2.5 million, and issued $32.8 million aggregate principal amount of New Notes for cash at par. We incurred $3.0 million of debt issuance costs in connection with the 2024 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2024 Notes. The closing of the private placement of the 2024 Notes occurred on August 19, 2020.

Holders of the 2024 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020, at a rate equal to 3.50% per annum. The 2024 Notes will mature on December 1, 2024, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date. Upon maturity the principal amount of the notes may be settled via shares of the Company’s Class A common stock. We recorded interest expense of $0.5 million of non-cash interest expense for each of the three and nine months ended September 30, 2020.

The 2024 Notes are convertible into cash, shares of the Company's Class A common stock, or a combination of cash and shares of the Company's Class A common stock, at the Company's election, based on an initial conversion rate of 54.8667 shares of Class A common stock per $1,000 principal amount of the 2024 Notes, which is equivalent to an initial conversion price of approximately $18.23 per share of the Company’s Class A common stock. In the aggregate, the 2024 Notes are initially convertible into 6.4 million shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole provision upon a fundamental change or a notice of redemption under the governing indenture). The conversion rate may be adjusted under certain circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election.

The option to settle the 2024 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2024 Notes into a debt component and an equity component. The debt component was determined to be $78.9 million, before issuance costs, based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be $38.1 million, before issuance costs, and was recorded within additional paid-in capital. The equity component is the difference between the aggregate principal amount of the debt and the fair value of the debt component. Issuance costs of $1.7 million and $1.3 million are allocated to the debt and equity components in proportion to the allocation of proceeds. Along with the equity component of $38.1 million, $1.7 million of issuance costs will be amortized to interest expense on the consolidated statements of operations and comprehensive income (loss) using the effective interest method over the contractual term of the 2024 Notes. The equity component recorded within additional paid-in capital will not be remeasured as long as it meets the conditions for equity classification. For both the three and nine months ended September 30, 2020, the Company recorded $0.8 million of interest expense related to the amortization of the debt discount and the issuance costs allocated to the debt component.

Holders of the 2024 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental change at a price equal to 100.0% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company may not redeem the 2024 Notes prior to March 1, 2023. The Company may redeem for cash all or any portion of the 2024 Notes, at its option, on or after March 1, 2023, if the last reported sale price of the Company’s Class A common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Credit Agreement

On December 30, 2019, the Company entered into a credit agreement, by and among the Company, Evolent Health LLC, as the borrower (the “Borrower”), certain subsidiaries of the Company, as guarantors, the lenders from time to time party thereto, and Ares Capital Corporation, as administrative agent and collateral agent, together with the Company (the “Credit Agreement”), pursuant to which the lenders agreed to extend credit to the Borrower in the form of (i) an initial secured term loan in the aggregate principal amount of $75.0 million (the “Initial Term Loan Facility”) and (ii) a delayed draw secured term loan facility in the aggregate principal amount of up to $50.0 million (the “DDTL Facility” and, together with the Initial Term Loan Facility, the “Senior Credit Facilities”), subject to the satisfaction of specified conditions. The Borrower borrowed the loan under the Initial Term Loan Facility on December 30, 2019. In connection with the Credit Agreement, on December 30, 2019, the Company entered into a Security Agreement, by and among the Company, the Borrower, the other guarantors and the collateral agent for the benefit of the secured parties, and a Guarantee Agreement, by the Company and each of the other guarantors in favor of the collateral agent for the benefit of the secured parties. The Senior Credit Facilities are guaranteed by the Company and the Company’s domestic subsidiaries, subject to certain exceptions. The Senior Credit Facilities are secured by a first priority security interest in all of the capital stock of the borrower and each guarantor (other than the Company) and substantially all of the assets of the borrower and each guarantor, subject to certain exceptions.

The proceeds of the Initial Term Loan were used to finance the Passport transaction and pay fees and expenses incurred in connection therewith. The proceeds of the DDTL Facility may be used, subject to the Company’s satisfaction of specified conditions, to finance the repayment or repurchase of the Company’s 2.00% Convertible Senior Notes due December 1, 2021 and to fund permitted acquisitions. The Initial Term Loan and any loans under the DDTL Facility will mature on the date that is the earliest of (a) December 30, 2024, (b) the date on which all amounts outstanding under the Credit Agreement have been declared or have automatically become due and payable under the terms of the Credit Agreement and (c) the date that is ninety-one (91) days prior to the maturity date of the 2021 Convertible Notes unless certain liquidity conditions are satisfied (the foregoing, the “Maturity Date”). The interest rate for each loan under the Senior Credit Facilities is calculated, at the option of the Borrower, at either the Eurodollar rate plus 8.00%, or the base rate plus 7.00%. A commitment fee of 1.00% per annum is payable by the Borrower quarterly in arrears on the unused portion of the DDTL Facility. The Company recorded $2.0 million and $6.0 million in interest expense related to our Credit Agreement for the three and nine months ended September 30, 2020.

Amounts outstanding under the Senior Credit Facilities may be prepaid at the option of the Borrower subject to applicable premiums, including a make-whole premium payable on certain prepayments made prior to the second anniversary of the closing of the Senior Credit Facilities, and a call protection premium payable on the amount prepaid in certain instances as follows: (1) 4.00% of the principal amount so prepaid after the second anniversary of the closing of the Senior Credit Facilities but prior the third anniversary of the closing of the Senior Credit Facilities; (2) 3.00% of the principal amount so prepaid after the third anniversary of the closing of the Senior Credit Facilities but prior the fourth anniversary of the closing of the Senior Credit Facilities; and (3) 2.00% of the principal amount so prepaid after the fourth anniversary of the closing of the Senior Credit Facilities but prior the fifth anniversary of the closing of the Senior Credit Facilities. Amounts outstanding under the Senior Credit Facility are subject to mandatory prepayment upon the occurrence of certain events and conditions, including non-ordinary course asset dispositions, receipt of certain casualty proceeds, issuances of certain debt obligations and a change of control transaction.

The Senior Credit Facilities contain customary borrowing conditions, affirmative, negative and reporting covenants, representations and warranties, and events of default, including cross-defaults to other material indebtedness. In addition, the Company is required to comply at certain times with certain financial covenants comprised of a minimum net revenue test and a minimum liquidity test commencing upon closing of the Senior Credit Facilities and a total secured leverage ratio commencing on the last day of the fiscal quarter ending March 31, 2021. If an event of default occurs, the lenders would be entitled to take enforcement action, including foreclosure on collateral and acceleration of amounts owed under the Senior Credit Facilities. We incurred $4.7 million of debt issuance costs in connection with this Credit Agreement, which will be included in long-term debt, net of discount on our consolidated balance sheets and will be amortized into interest expense over the life of the agreement. For the three and nine months ended September 30, 2020, the Company recorded $0.6 million and $1.7 million in interest expense related to the amortization of the debt discount and the issuance costs.

The Company was in compliance with all applicable covenants as of September 30, 2020.

On August 19, 2020, an amendment to the Company's Credit Agreement became effective. The amendment effected changes to, among other things, permit the Company's use of cash in the exchange transactions in connection with the issuance of the 2024 Notes, permit the issuance of the 2024 Notes and permit certain note repurchases, as well as to implement amendments to certain liquidity thresholds.

Warrant Agreement

In conjunction with the Company’s entry into the Credit Agreement, the Company entered into warrant agreements whereby it agreed to sell to the holders of the warrants an aggregate of 1,513,786 shares of Class A common stock at a per share purchase price equal to $8.05. The holders can exercise the warrants at any time until thirty days after the maturity of the Credit Agreement. The Company, at its sole discretion, can elect to pay the holders in cash in an amount determined based on the fair market value of the Class A common stock for the shares of Class A common stock issuable upon exercise of the warrants in lieu of delivering the shares.

2025 Notes

In October 2018, the Company issued $172.5 million aggregate principal amount of its 1.50% Convertible Senior Notes due 2025 (the “2025 Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The 2025 Notes were issued at par for net proceeds of $166.6 million. We incurred $5.9 million of debt issuance costs in connection with the 2025 Notes. The closing of the private placement of $150.0 million aggregate principal amount of the 2025 Notes occurred on October 22, 2018, and the Company completed the offering and sale of an additional $22.5 million aggregate principal amount of the 2025 Notes on October 24, 2018, pursuant to the initial purchasers’ exercise in full of their option to purchase additional notes.

Holders of the 2025 Notes are entitled to cash interest payments, which are payable semiannually in arrears on April 15 and October 15 of each year, beginning on April 15, 2019, at a rate equal to 1.50% per annum. The Company recorded interest expense of $0.6 million and $1.9 million related to the 2025 Notes for the three and nine months ended September 30, 2020 and 2019, respectively. The 2025 Notes will mature on October 15, 2025, unless earlier repurchased, redeemed or converted in accordance with their terms prior to such date.

Prior to the close of business on the business day immediately preceding April 15, 2025, the 2025 Notes will be convertible at the option of the holders only upon the satisfaction of certain conditions, as described in the indenture, dated as of October 22, 2018, between the Company and U.S. Bank National Association, as trustee. At any time on or after April 15, 2025, until the close of business on the business day immediately preceding the maturity date, holders may convert, at their option, all or any portion of their notes at the conversion rate.

The 2025 Notes will be convertible at an initial conversion rate of 29.9135 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $33.43 per share of the Company’s Class A common stock. In the aggregate, the 2025 Notes are initially convertible into 5.2 million shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole fundamental change or a

notice of redemption as described in the governing indenture). The conversion rate may be adjusted under certain circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election.

The option to settle the 2025 Notes in cash or shares of the Company’s Class A common stock, or a combination of cash and shares of the Company’s Class A common stock, at the Company’s election, resulted in a bifurcation of the carrying value of the 2025 Notes into a debt component and an equity component. The debt component was determined to be $100.7 million, before issuance costs, based on the fair value of a nonconvertible debt instrument with the same term. The equity component was determined to be $71.8 million, before issuance costs, and was recorded within additional paid-in capital. The equity component is the difference between the aggregate principal amount of the debt and the debt component. Issuance costs of $3.4 million and $2.5 million are allocated to the debt and equity components in proportion to the allocation of proceeds. Along with the equity component of $71.8 million, $3.4 million of issuance costs will be amortized to interest expense on the consolidated statements of operations and comprehensive income (loss) using the effective interest method over the contractual term of the 2025 Notes. The equity component recorded within additional paid-in capital will not be remeasured as long as it meets the conditions for equity classification. For the three and nine months ended September 30, 2020, the Company recorded $2.3 million and $6.6 million, respectively, and $2.1 million and $6.2 million for the three and nine months ended September 30, 2019, respectively, of interest expense related to the amortization of the debt discount and the issuance costs allocated to the debt component.

Holders of the 2025 Notes may require the Company to repurchase all or part of their notes upon the occurrence of a fundamental change at a price equal to 100.0% of the principal amount of the notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company may not redeem the 2025 Notes prior to October 20, 2022. The Company may redeem for cash all or any portion of the 2025 Notes, at its option, on or after October 20, 2022, if the last reported sale price of the Company’s Class A common stock has been at least 130.0% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100.0% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

2021 Notes

In December 2016, the Company issued $125.0 million aggregate principal amount of its 2.00% Convertible Senior Notes due 2021 (the “2021 Notes”) in a private placement to qualified institutional buyers within the meaning of Rule 144A under the Securities Act. The 2021 Notes were issued at par for net proceeds of $120.4 million. We incurred $4.6 million of debt issuance costs in connection with the 2021 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2021 Notes, since this method was not materially different from the effective interest method. The closing of the private placement of the 2021 Notes occurred on December 5, 2016.

Holders of the 2021 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year, beginning on June 1, 2017, at a rate equal to 2.00% per annum. The 2021 Notes will mature on December 1, 2021, unless earlier repurchased or converted in accordance with their terms prior to such date. In addition, holders of the 2021 Notes may require the Company to repurchase all or part of their 2021 Notes upon the occurrence of a fundamental change at a price equal to 100.00% of the principal amount of the 2021 Notes being repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental repurchase date. Upon maturity the principal amount of the notes may be settled via shares of the Company’s Class A common stock. We recorded interest expense of $0.3 million and $1.5 million and non-cash interest expense related to the amortization of deferred financing costs of $0.1 million and $0.6 million for each of the three and nine months ended September 30, 2020, respectively. We recorded interest expense of $0.6 million and $1.9 million and non-cash interest expense related to the amortization of deferred financing costs of $0.2 million and $0.7 million for each of the three and nine months ended September 30, 2019, respectively.

The 2021 Notes are convertible into shares of the Company’s Class A common stock, based on an initial conversion rate of 41.6082 shares of Class A common stock per $1,000 principal amount of the 2021 Notes, which is equivalent to an initial conversion price of approximately $24.03 per share of the Company’s Class A common stock. In the aggregate, the 2021 Notes are initially convertible into 5.2 million shares of the Company’s Class A common stock (excluding any shares issuable by the Company upon a conversion in connection with a make-whole provision upon a fundamental change under the governing indenture). The conversion rate may be adjusted under certain circumstances.

The 2021 Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders at any time prior to the close of business on the business day immediately preceding the maturity date. Upon conversion, we will deliver for each $1,000 principal amount of notes converted a number of shares of our Class A common stock equal to the applicable conversion rate (together with a cash payment in lieu of delivering any fractional share) on the third business day following the relevant conversion date.

In August 2020, as part of the issuance of the 2024 Notes, the Company consummated an exchange offer pursuant to which it issued $84.2 million aggregate principal amount of the 2024 Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. There was no cash consideration in these exchanges outside of an aggregate cash payment of $2.5 million paid to exchanging noteholders. These exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment of $2.5 million paid to exchanging noteholders.

In August 2020, we repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on extinguishment of debt.

Convertible Senior Notes Carrying Value

The 2025 Notes, 2024 Notes and 2021 Notes are recorded on our accompanying consolidated balance sheets at their net carrying values as of September 30, 2020. However, the 2025 Notes, 2024 Notes and 2021 Notes are privately traded by qualified institutional buyers (within the meaning of Rule 144A under the Securities Act) and their fair values are Level 2 inputs. The 2024 Notes, 2025 Notes and the 2021 Notes also have embedded conversion options and contingent interest provisions, which have not been recorded as separate financial instruments. The following table summarizes the carrying value of the long-term convertible debt (in thousands):


	September 30, 2020		December 31, 2019
2024 Notes
Carrying value	$	79,768	$	—
Unamortized debt discount and issuance costs	37,283		—
Principal amount	$	117,051	$	—
Remaining amortization period (years)	4.2
Fair value	$	117,030	$	—

2025 Notes
Carrying value	$	113,982	$	107,169
Unamortized debt discount and issuance costs	58,518		65,331
Principal amount	$	172,500	$	172,500
Remaining amortization period (years)	5.0		5.8
Fair value	$	137,353	$	122,048

2021 Notes
Carrying value	$	26,507	$	123,237
Unamortized issuance costs	230		1,763
Principal amount	$	26,737	$	125,000
Remaining amortization period (years)	1.2		1.9
Fair value	$	26,257	$	111,250

Note 10. Commitments and Contingencies

Commitments

Commitments to Equity-Method Investees

During the three months ended September 30, 2020, the Company terminated a previous contractual arrangement with an equity-method investee that required the Company to provide operating capital and reserve support in the form of debt financing in accordance with the Company’s contribution agreements. No payments were made under this agreement.

During May 2020, the CHFS announced that Passport was not awarded a Kentucky managed Medicaid contract for the next contract period. As a result, the Company is required to acquire the Sponsors’ 30% ownership interest in Passport Buyer for $20.0 million within twelve months following the novation of Passport’s Medicaid contract to Molina on September 1, 2020. Refer to Note 4 for additional information about the investment in Passport.

Letters of Credit

During the second quarter of 2020, the Company established an irrevocable standby letter of credit with a bank for $5.0 million for the benefit of a regulatory authority and, as such, held $5.0 million in restricted cash and restricted investments as collateral as of September 30, 2020. The letter of credit expires on December 31, 2020 and will be automatically extended without amendment for an additional one-year period and will continue to automatically extend after each one-year term from the expiry date, unless the bank elects not to extend beyond the initial or any extended expiry date.

During the third quarter of 2019, the Company established an irrevocable standby letter of credit with a bank for $1.8 million for the benefit of a regulatory authority and, as such, held $1.8 million in restricted cash and restricted investments as collateral as of both September 30, 2020 and December 31, 2019, respectively. The letter of credit expired on December 31, 2019 and was automatically extended without amendment for an additional one-year period and will continue to automatically extend after each one-year term from the expiry date, unless the bank elects not to extend beyond the initial or any extended expiry date.

Indemnifications

The Company’s customer agreements generally include a provision by which the Company agrees to defend its partners against third-party claims (a) for death, bodily injury, or damage to personal property caused by Company negligence or willful misconduct, (b) by former or current Company employees arising from such managed service agreements, (c) for intellectual property infringement under specified conditions and (d) for Company violation of applicable laws, and to indemnify them against any damages and costs awarded in connection with such claims. To date, the Company has not incurred any material costs as a result of such indemnities and has not accrued any liabilities related to such obligations in the accompanying consolidated financial statements.

During the second quarter of 2019, the Company and Passport, a current customer (collectively the “Indemnitors”), pursuant to a state requirement of all participating Medicaid Managed Care Organizations, entered into an indemnity agreement with a surety. The surety issued a performance bond in the amount of $25.0 million to secure the customer’s performance under a contract to provide Medicaid managed care services for the benefit of a beneficiary. Pursuant to the indemnity agreement, the Indemnitors are jointly and severally liable to the surety in the maximum amount of the bond, plus certain costs of the surety, in the event of losses arising under the bond. The bond’s effective date is July 1, 2019, and original expiry date was June 30, 2020. During the three months June 30, 2020, the expiry date was extended to December 31, 2020. To date, the Company has not incurred any material costs as a result of the Indemnity Agreement and has not accrued any liabilities related to it in the accompanying consolidated financial statements.

Pre-IPO Investor Registration Rights Agreement

We entered into a registration rights agreement with The Advisory Board, UPMC, TPG and another investor to register for sale under the Securities Act shares of our Class A common stock, including those delivered in exchange for Class B common stock and Class B common units. Subject to certain conditions and limitations, this agreement provides these investors with certain demand, piggyback and shelf registration rights. The registration rights granted under the registration rights agreement will terminate upon the date the holders of shares that are a party thereto no longer hold any such shares that are entitled to registration rights. Pursuant to our contractual obligations under this agreement, we filed a registration statement on Form S-3 with the SEC on July 28, 2016, which was declared effective on August 12, 2016.

We will pay all expenses relating to any demand, piggyback or shelf registration, other than underwriting discounts and commissions and any transfer taxes, subject to specified conditions and limitations. The registration rights agreement includes customary indemnification provisions, including indemnification of the participating holders of shares of Class A common stock and their directors, officers and employees by us for any losses, claims, damages or liabilities in respect thereof and expenses to which such holders may become subject under the Securities Act, state law or otherwise. We did not incur any expenses related to secondary offerings or other sales of shares by our investor stockholders for the three and nine months ended September 30, 2020.

Momentum Registration Rights Agreement

On May 24, 2019, in connection with the GlobalHealth transaction, the Company entered into a registration rights agreement with Momentum Health Holdings, LLC (“MHG”), which granted certain registration rights to MHG as a holder of shares of the Company’s Class A common stock. Pursuant to our contractual obligations under this agreement, we filed a resale prospectus supplement in respect of the registrable shares on May 28, 2019.

The Company will pay certain costs and expenses, other than any underwriting discounts and commissions, in connection with the relevant resale registration statement. We did not incur any material expenses related to the resale registration statement during the three and nine months ended September 30, 2020.

Guarantees

In connection with the Closing of the Molina APA, Passport will continue to provide administrative support services to Molina through the end of 2020. Passport will be begin working with regulatory authorities including the Kentucky Department of Insurance ("KY DOI") regarding the wind down of its operations throughout 2021. As part of that wind down process, the Company, as the parent of Passport, has entered into a guarantee for the benefit of the KY DOI to satisfy any Passport liability or obligation in the event Passport is not able to meet its wind down liabilities or obligations.

As part of our strategy to support certain of our partners in the Next Generation Accountable Care Program, we entered into upside and downside risk-sharing arrangements. Our downside risk-sharing arrangements are limited to our fees and are executed through our wholly-owned captive insurance company. To satisfy the capital requirements of our captive insurance entity as well as state insurance regulators, the Company entered into letters of credit of $9.9 million and $5.7 million as of September 30, 2020 and December 31, 2019, respectively, to secure potential losses related to insurance services. These amounts are in excess of our actuarial assessment of loss.

During the three and nine months ended September 30, 2020, the Company entered into a guarantee agreement whereby it agreed to provide support on behalf of Passport Buyer to maintain a minimum risk-based-capital of 150% with the KY DOI. The maximum exposure is limited to amounts funded to return Passport Buyer to a risk-based-capital of 150%, however as of September 30, 2020, no amounts have been funded under this guarantee.

Reinsurance Agreements

During the fourth quarter of 2019, Passport acquired the Medicaid Business of the University Health Care, Inc. (“UHC”) and entered into an agreement with UHC that provided for (i) the transfer of the D-SNP Business when Passport became certified as a Medicare Advantage Organization and (ii) the transfer of the Real Property when it was able to be transferred free and clear of any encumbrances. Further, until Passport acquired the D-SNP Business, Passport administered and assumed the financial risk of the D-SNP Business . On October 1, 2020, the D-SNP Business was transferred from UHC to Passport.

Pursuant to the Molina APA, the D-SNP Contract will be transferred to Molina at such time as Molina is certified as a Medicare Advantage Organization and obtains approvals of certain governmental authorities, including CMS and DMS, for the novation of the D-SNP Contract. At the Closing, Molina assumed the financial risk of the D-SNP Business until such time as the D-SNP Business is transferred to Molina or the D-SNP Contract is terminated. Passport and the Company will continue to administer the D-SNP Business until January 1, 2021, at which time Molina will be responsible for the administration of the D-SNP Business until the D-SNP Contract is transferred to Molina or the D-SNP Contract is terminated.

During the fourth quarter of 2017, the Company entered into a $10.0 million capital-only reinsurance agreement with NMHC which expired on December 31, 2018. The purpose of the capital-only reinsurance was to provide balance sheet support to NMHC. There was no uncertainty to the outcome of the agreement as there was no transfer of underwriting risk to Evolent or True Health, and neither Evolent nor True Health was at risk for any cash payments on behalf of NMHC. As a result, this agreement did not qualify for reinsurance accounting.

During the fourth quarter of 2018, the Company terminated its prior reinsurance agreement with NMHC and entered into a 15-month quota-share reinsurance agreement with NMHC. Under the terms of the new reinsurance agreement, NMHC ceded 90% of its gross premiums to the Company and the Company indemnified NMHC for 90% of its claims liability. The maximum amount of exposure to the Company was capped at 105% of premiums ceded to the Company by NMHC. The new reinsurance agreement qualified for reinsurance accounting due to the deemed risk transfer and, as such, the Company recorded the full amount of the gross reinsurance premiums and claims assumed by the Company within premiums and claims expenses, respectively, and recorded claims-related administrative expenses within selling, general and administrative expenses on our consolidated statements of operations and comprehensive income (loss) from the legal effective date of the Reinsurance Agreement. Amounts owed to NMHC under the reinsurance agreement are recorded within reserves for claims and performance-based arrangements on our consolidated balance sheets. Amounts owed by NMHC under the reinsurance agreement are recorded within accounts receivable, net on our consolidated balance sheets.

During the third quarter of 2019, the Company terminated the new reinsurance agreement with NMHC effective in the fourth quarter of 2019, approximately one and a half months prior to its scheduled end.

The following summarizes premiums and claims assumed under the Reinsurance Agreements (in thousands):


	For the Nine Months Ended September 30,
	2020		2019
Reinsurance premiums assumed	$	3,275	$	71,698
Reinsurance premiums ceded	(3,275)		—
Claims assumed	2,959		61,655
Claims ceded	(422)		—
Claims-related administrative expenses	—		12,069
Increase in reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement	2,537		2,026
Reserves for claims and performance-based arrangements attributable to the Reinsurance Agreement at the beginning of the period	(502)		1,243
Reinsurance payments paid (received)	(502)		2,057
Payable for claims and performance-based arrangements attributable to the Reinsurance Agreement at the end of the period	$	2,537	$	1,212

UPMC Reseller Agreement

The Company and UPMC are parties to a reseller, services and non-competition agreement, dated August 31, 2011, which was amended and restated by the parties on June 27, 2013 (as amended through the date hereof, the “UPMC Reseller Agreement”). Under the terms of the UPMC Reseller Agreement, UPMC has appointed the Company as a non-exclusive reseller of certain services, subject to certain conditions and limitations specified in the UPMC Reseller Agreement. In consideration for the Company’s obligations under the UPMC Reseller Agreement and subject to certain conditions described therein, UPMC has agreed not to sell certain products and services directly to a defined list of 20 of the Company’s customers.

Contingencies

Tax Receivables Agreement

In connection with the Offering Reorganization, the Company entered into the Tax Receivables Agreement (the “TRA”) with certain of its investors, which provides for the payment by the Company to these investors of 85% of the amount of the tax benefits, if any, that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as tax benefits attributable to the future utilization of pre-IPO NOLs.

Due to the items noted above, and the fact that Evolent Health, Inc. is in a full valuation allowance position such that the deferred tax assets related to the Company’s historical pre-IPO losses and tax basis increase benefit from exchanges have not been realized, the Company has not recorded a liability pursuant to the TRA.

Litigation Matters

On August 8, 2019, a shareholder of the Company filed a class action complaint against the Company, asserting claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934, in the United States District Court, Eastern District of Virginia, Alexandria Division. An amended complaint was filed on January 10, 2020. The case, Plymouth County Retirement System v. Evolent Health, Inc., Frank Williams, Nicholas McGrane, Seth Blackley, Christie Spencer, and Steven Wigginton, alleges that the Company’s executives made false or misleading statements regarding its business with Passport. A second amended complaint, which was substantially similar to the amended complaint, was filed on June 8, 2020. The Company filed a motion to dismiss in response on June 22, 2020 and the briefing was completed on July 17, 2020; the parties are now waiting for the court’s decision. Under the Private Securities Litigation Reform Act, PSLRA, all discovery in the case is stayed until the motion to dismiss is decided upon by the court. Based on the Company’s investigation so far, we believe the case has little legal or factual merit. However, the outcome of any litigation is uncertain, and at this early stage, the Company is currently unable to assess the probability of loss or estimate a range of potential loss, if any, associated with this lawsuit.

The Company is not aware of any other legal proceedings or claims as of September 30, 2020, that the Company believes will have, individually or in the aggregate, a material adverse effect on the Company’s financial position or result of operations.

Credit and Concentration Risk

The Company is subject to significant concentrations of credit risk related to cash and cash equivalents and accounts receivable. As of September 30, 2020, approximately 98.4% of our $400.6 million of cash and cash equivalents (including restricted cash) were held in bank deposits with FDIC participating banks, approximately 1.4% were held in money market funds and 0.2% were held in international banks. While the Company maintains its cash and cash equivalents with financial institutions with high credit ratings, it often maintains these deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any realized losses on cash and cash equivalents to date.

The Company is also subject to significant concentration of accounts receivable risk as a substantial portion of our trade accounts receivable is derived from a small number of our partners. The following table summarizes the partner included in our Services segment who represented at least 10.0% of our consolidated trade accounts receivable for the periods presented:


	September 30, 2020		December 31, 2019
Cook County Health and Hospitals System	56.6	%	48.4	%

In addition, the Company is subject to significant concentration of revenue risk as a substantial portion of our revenue is derived from a small number of contractual relationships with our operating partners.

The following table summarizes those customers of our Services segment who represented at least 10.0% of our consolidated revenue for the periods presented:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Passport (1)	20.7	%	22.2	%	22.6	%	16.4	%
New Mexico Health Connections	*		11.4	%	*		12.8	%
Cook County Health and Hospitals Systems	21.0	%	*		19.9	%	*

(1) Subsequent to the consolidation of Passport on September 1, 2020, the Company does not expect any material revenue from this contract, however as part of the novation of the Passport Medicaid contract to Molina, we entered into a new contract with Molina on similar terms to our prior services contract with Passport through December 31, 2020.

* Represents less than 10.0% of the respective balance

We derive a significant portion of our revenues from our largest partners. The loss, termination or renegotiation of our relationship or contract with any significant partner or multiple partners in the aggregate could have a material adverse effect on the Company's financial condition and results of operations.

Note 11. Leases

The Company enters into various office space, data center, and equipment lease agreements in conducting its normal business operations. At the inception of any contract, the Company evaluates the agreement to determine whether the contract contains a lease. If the contract contains a lease, the Company then evaluates the term and whether the lease is an operating or finance lease. Most leases include one or more options to renew or may have a termination option. The Company determines whether these options are reasonably certain to be exercised or not at the inception of the lease. In addition, some leases contain escalation clauses. The rent expense is recognized on a straight-line basis in the consolidated statements of operations and comprehensive income (loss) over the term of the lease. Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. Further, the Company treats all lease and non-lease components as a single combined lease component for all classes of underlying assets. The Company also enters into sublease agreements for some of its leased office space. Immaterial rental income attributable to subleases is offset against rent expense over the terms of the respective leases.

The Company leases office space and computer and other equipment under operating lease agreements expiring at various dates through 2031. Under the lease agreements, in addition to base rent, the Company is generally responsible for operating and maintenance costs and related fees. Several of these agreements include tenant improvement allowances, rent holidays or rent escalation clauses. When such items are included in a lease agreement, we record a deferred rent asset or liability on our consolidated balance sheets equal to the difference between rent expense and future minimum lease payments due. The rent expense related to these items is recognized on a straight-line basis over the terms of the leases. The Company’s primary office location is in Arlington, Virginia, which has served as its corporate headquarters since 2013. The Arlington, Virginia office lease expires in January 2032. Certain leases acquired as part of the Valence Health transaction included existing sublease agreements for office locations in Chicago, Illinois.

In connection with various lease agreements, the Company is required to maintain $3.5 million in letters of credit. As of September 30, 2020 and December 31, 2019, the Company held $3.5 million and $3.6 million in restricted cash and restricted investments on the consolidated balance sheet as collateral for the letters of credit, respectively.

The following table summarizes our primary office leases as of September 30, 2020 (in thousands):


Location	Lease Termination Term (in years)	Future Minimum Lease Commitments		Letter of Credit Amount Required
Arlington, VA	11.3	$	39,439	$	1,579
Riverside, IL	10.5	45,322		232
Pune, India	3.0	2,514		—
Brea, CA	1.7	1,824		—

The following table summarizes the components of our lease cost (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Operating lease cost	$	6,389	$	3,288	$	13,031	$	10,407
Amortization of right-of-use assets	—		—		299		—
Interest expense	—		—		3		—
Variable lease cost	1,327		929		3,844		3,505
Total lease cost	$	7,716	$	4,217	$	17,177	$	13,912

Maturity of lease liabilities (in thousands) as of September 30, 2020, is as follows:


	Operating lease expense(1)
2020	3,049
2021	11,642
2022	9,647
2023	9,105
2024	8,833
Thereafter	56,093
Total lease payments	98,369
Less:
Interest	26,193
Present value of lease liabilities	$	72,176

(1) We have additional operating lease agreements for office space that have not yet commenced as of September 30, 2020. The minimum lease payments for those leases are $1.4 million and the leases will commence during 2020.

Our weighted-average discount rate and our weighted remaining lease terms (in years) are as follows:


	September 30, 2020		December 31, 2019
Weighted average discount rate	6.43	%	6.25	%
Weighted average remaining lease term	9.5		9.9

Note 12. Earnings (Loss) Per Common Share

The following table sets forth the computation of basic and diluted earnings per share available for common stockholders (in thousands, except per share data):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss	$	(38,170)	$	(25,738)	$	(320,443)	$	(106,287)
Less:
Net loss attributable to non-controlling interests	(822)		(217)		(822)		(2,412)
Net loss available for common shareholders - basic and diluted (1)	$	(37,348)	$	(25,521)	$	(319,621)	$	(103,875)

Weighted-average common shares outstanding - basic and diluted (1)	85,172		83,819		82,615		81,831

Loss per common share
Basic and diluted	$	(0.44)	$	(0.30)	$	(3.87)	$	(1.27)

(1) Each Class B common unit of Evolent Health LLC can be exchanged (together with a corresponding number of shares of our Class B common stock) for one share of our Class A common stock. As holders exchange their Class B common shares for Class A common shares, our interest in Evolent Health LLC will increase. Therefore, shares of our Class B common stock are not considered dilutive shares for the purposes of calculating our diluted earnings (loss) per common share as related adjustment to net income (loss) available for common shareholders would equally offset the additional shares, resulting in the same earnings (loss) per common share.

Anti-dilutive shares (in thousands) excluded from the calculation of weighted-average common shares presented above are presented below:


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2020	2019	2020	2019
Exchangeable Class B common stock	—	706	—	1,650
Restricted stock units ("RSUs"), performance-based RSUs and leveraged stock units ("LSUs")	1,042	548	600	857
Stock options	1,362	834	1,016	1,427
Convertible senior notes	9,789	10,361	10,169	10,361
Total	12,193	12,449	11,785	14,295

Note 13. Stock-based Compensation

Total compensation expense by award type and line item in our consolidated financial statements was as follows (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Award Type
Stock options	$	584	$	223	$	1,972	$	2,486
Performance-based stock options	—		112		75		334
RSUs	1,704		2,280		5,566		7,340
Performance-based RSUs	—		2,406		—		3,178
LSUs	876		737		2,762		1,707
Total compensation expense by award type	$	3,164	$	5,758	$	10,375	$	15,045

Line Item
Cost of revenue	$	436	$	1,597	$	1,354	$	3,279
Selling, general and administrative expenses	2,728		4,161		9,021		11,766
Total compensation expense by financial statement line item	$	3,164	$	5,758	$	10,375	$	15,045

No stock-based compensation was capitalized as software development costs for the three and nine months ended September 30, 2020 and 2019.

Stock-based awards were granted as follows (in thousands):


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2020	2019	2020	2019
Stock options	—	38	—	437
RSUs	52	212	1,192	730
Performance-based RSUs	—	903	—	903
LSUs	—	—	520	720

Note 14. Income Taxes

For interim periods, we recognize an income tax provision (benefit) based on our estimated annual effective tax rate expected for the full year.

An income tax expense (benefit) of $0.5 million and $(0.8) million was recognized for the three months ended September 30, 2020 and 2019, respectively, which resulted in effective tax rates of (1.3)% and 3.2%, respectively. An income tax expense (benefit) of $(3.1) million and less than $0.1 million was recognized for the nine months ended September 30, 2020 and 2019 respectively, which resulted in effective tax rates of 1.0% and (0.1)%, respectively.

The $0.5 million of income tax expense the Company recorded during the three months ended September 30, 2020 primarily relates to the operations of Passport Buyer and foreign taxes.

The $(3.1) million of income tax benefit the Company recorded during the nine months ended September 30, 2020 primarily relates to the impacts of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On March 27, 2020, in response to the COVID-19 pandemic, the CARES Act, was signed into law. The CARES Act allows net operating losses (“NOLs”) incurred in 2018, 2019 and 2020 to be carried back to each of the five preceding taxable years for the recovery of previously paid federal income taxes. During the second quarter the Company recorded an income tax benefit related to the reversal of valuation allowance against $2.3 million of deferred tax asset, which was realized when the Company decided during the second quarter to carry back New Century Health’s 2018 NOL as part of a federal income tax refund claim for taxes it paid on income in 2013 and 2014. In addition, the Company recognized $1.4 million of income tax benefit due to the difference between the federal tax rate utilized to measure such deferred tax asset and the federal tax rate applicable to the income in the years to which the NOL was carried back. As a result of the NOL carryback, the Company estimates that it will incur additional 2019 income taxes and therefore it recognized $0.6 million of

income tax expense. The remaining income tax provisions included in the CARES Act, apart from the aforementioned NOL carryback, did not have a significant impact on the Company as of the third quarter ended September 30, 2020.

The less than $0.1 million of income tax expense the Company recorded during the nine months ended September 30, 2019 primarily relates to the non-cash gain on disposal of assets related to True Health Indiana Inc. recorded in the second quarter of 2019.

In general, the Company and its U.S. subsidiaries continue to recognize a valuation allowance against its net deferred tax asset, with the exception of a limited amount of indefinite-lived deferred tax assets for which a limited amount of indefinite-lived deferred tax liability provides a source of income. The indefinite-lived deferred tax liability was reduced during the second quarter of 2020 as a result of the goodwill impairment and the Company recognized a corresponding income tax benefit of $0.8 million.

As of December 31, 2019, the Company had unrecognized tax benefits of $0.8 million that, if recognized, would not affect the effective tax rate due to the valuation allowance against its net deferred tax asset. As of September 30, 2020, there are no changes to the unrecognized tax benefits. The Company is not currently subject to income tax audits in any U.S., state, or foreign jurisdictions for any tax year.

Tax Receivables Agreement

In connection with the Offering Reorganization, the Company entered into the TRA with certain of its investors, which provides for the payment by the Company to these investors of 85% of the amount of the tax benefits, if any, that the Company is deemed to realize as a result of increases in our tax basis related to exchanges of Class B common units as well as tax benefits attributable to the future utilization of pre-IPO NOLs. See Note 10 above and “Part II - Item 8. Financial Statements and Supplementary Data - Note 13” in our 2019 Form 10-K for discussion of our TRA.

Note 15. Investments In and Advances to Equity Method Investees

The Company holds ownership interests in joint ventures and other entities which are accounted for under the equity method. The Company evaluates its interests in these entities to determine whether they meet the definition of a VIE and whether the Company is required to consolidate these entities. A VIE is consolidated by its primary beneficiary, which is the party that has both (i) the power to direct the activities that most significantly impact the economic performance of the VIE and (ii) a variable interest that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the Company's involvement with the VIE. The Company has determined that its interests in these entities meet the definition of a variable interest, however, the Company is not the primary beneficiary since it does not have the power to direct activities, therefore, the Company did not consolidate the VIEs below.

As of September 30, 2020 and December 31, 2019, the Company’s economic interests in its equity method investments ranged between 4% and 40%, and voting interests in its equity method investments ranged between 25% and 40%. The Company determined that it has significant influence over these entities but that it does not have control over any of the entities. Accordingly, the investments are accounted for under the equity method of accounting and the Company is allocated its proportional share of the entities’ earnings and losses for each reporting period. The Company’s proportional share of the gains (losses) from these investments was approximately $(13.7) million and $11.0 million for the three and nine months ended September 30, 2020, respectively, and $(3.9) million and $(6.2) million for the three and nine months ended September 30, 2019, respectively.

The Company signed services agreements with certain of the aforementioned entities to provide certain management, operational and support services to help manage elements of their service offerings. Revenue related to these services agreements for the three and nine months ended September 30, 2020 was $65.9 million and $197.2 million, respectively, and $11.8 million and $29.9 million for the three and nine months ended September 30, 2019, respectively.

Passport

On December 30, 2019, we completed the acquisition of approximately 70% ownership interest in Passport Buyer, which owns substantially all of the assets and assumed substantially all of the liabilities of UHC. At closing, we contributed approximately $70.0 million in cash and issued a 30% equity interest in the Passport Buyer to the Sponsors. At the closing of the transaction, our economic interest in Passport Buyer was approximately 70% and our voting interest was approximately 57%. As a result of Passport not being awarded a new Medicaid contract with CHFS, the Company is required to acquire the Sponsors’ 30% ownership interest in Passport Buyer for $20.0 million within twelve months following the novation of Passport’s Medicaid contract to Molina on September 1, 2020. Refer to Note 4 for additional information about the investment in Passport.

Unconsolidated VIEs

Global

On May 24, 2019, we completed the acquisition of approximately a 45% ownership interest in MHG, the sole owner of Momentum Health Acquisition, Inc. (“MHA”), which is the sole owner of GlobalHealth Holdings, LLC (“GHH”), which is the sole owner of GlobalHealth, Inc., a health maintenance organization based in the State of Oklahoma that offers, among other things, Medicare Advantage products in the State of Oklahoma. At closing, we contributed approximately $15.0 million in cash and 1,577,841 shares of our Class A common stock to MHG, together with certain of our other assets. The Company recognized $9.6 million non-cash gain on disposal of assets upon the contribution. We also recognized a short-term contingent consideration liability fair valued at $5.9 million at the time of the transaction. At the closing of the transaction, our economic interest in GlobalHealth was approximately 45% and our voting interest was approximately 29%.

As of March 31, 2020, the Oklahoma Insurance Division (“OID”) informed GlobalHealth, Inc. that in response to the COVID-19 pandemic, the OID required GlobalHealth, Inc. to increase its regulatory capital surplus by May 15, 2020. It would otherwise be placed into receivership if additional financing could not be secured. Certain investors agreed to provide liquidity as necessary to increase statutory capital reserves to no lower than 300%. In connection with the investment, GlobalHealth, Inc. transferred 100% of the equity interests in GlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred on May 13, 2020. As a result of this transaction, we recorded a non-cash impairment charge of approximately $47.1 million, representing the total value of our investment, in impairment of equity method investments on the consolidated statements of operations for the three months ended March 31, 2020.

The following table represents the carrying value of the associated assets and liabilities and the associated maximum loss exposure for the unconsolidated VIEs as of the date indicated (in thousands):


	December 31, 2019
	Passport Buyer		Momentum Health Group, LLC
Assets:
Current assets	$	271,894	$	50,729
Non current assets	577		39,259
Total assets	$	272,471	$	89,988
Liabilities:
Current liabilities	181,206		55,442
Non current liabilities	40		44,650
Total liabilities	$	181,246	$	100,092

Investment carrying value	$	70,000	$	46,456
Loan and interest receivable	41,387		—
Guarantee	25,000		—
Maximum exposure	$	136,387	$	46,456

Summarized Financial Information of Equity Method Investees

The following table represents the aggregated summarized financial information as of and for the dates indicated (in thousands):


	September 30, 2020		December 31, 2019
Current assets	$	46,084	$	356,085
Non-current assets	3,909		43,744
Current liabilities	29,407		267,300
Non-current liabilities	17,008		57,599
Non-controlling interests	3,638		70,535


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue	$	501,211	$	100,534	$	1,695,487	$	290,509
Operating income (loss)	(19,887)		(6,447)		14,193		(12,321)
Net income (loss)	(14,957)		(8,358)		12,686		(20,543)
Net income (loss) attributable to entity	(11,123)		(8,272)		6,589		(8,619)

Note 16. Non-controlling Interests

Immediately following the Offering Reorganization and IPO in May 2015, the Company owned 70.3% of Evolent Health LLC. The Company’s ownership percentage changes with the issuance of Class A or Class B common stock and Class B Exchanges. In order to account for any changes in the Company’s ownership of Evolent Health LLC, we record a reclassification of equity between non-controlling interests and shareholders’ equity attributable to Evolent Health, Inc.

During 2020, in connection with the consolidation of Passport, the Company recognized a $25.7 million non-controlling interest for the Sponsors’ 30% equity interest in Passport Buyer which represents the fair value of the non-controlling interest as of the date of acquisition. The Company is required to acquire the Sponsors’ 30% ownership interest for $20.0 million within twelve months following the novation of Passport’s Medicaid contract to Molina on September 1, 2020.

During 2019, all remaining holders of Class B units executed Class B Exchanges. These Class B Exchanges resulted in the issuance of 3.1 million shares of the Company’s Class A common stock. As a result of these Class B Exchanges and Evolent Health LLC’s cancellation of the related Class B units, the Company’s economic interest in Evolent Health LLC increased to 100% immediately following the final Class B Exchange during the quarter, and, accordingly, we reclassified a portion of our non-controlling interests into shareholders’ equity attributable to Evolent Health, Inc. The Company paid $1.3 million on behalf of certain holders of Class B units to satisfy income tax obligations related to certain exchanges.

In May 2019, the Company issued 1.6 million Class A common shares as part of the consideration for the GlobalHealth transaction. For each share of Class A common stock issued by Evolent Health, Inc., the Company received a corresponding Class A common unit from Evolent Health LLC. As a result of the Class A common units (and corresponding Class A common shares) issued as part of the GlobalHealth transaction, the Company’s economic interest in Evolent Health LLC increased from 99.1% to 99.2%, immediately following the transaction.

Changes in non-controlling interests (in thousands) for the periods presented were as follows:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Non-controlling interests balance as of beginning of period	$	—	$	16,078	$	6,689	$	45,532
Decrease in non-controlling interests as a result of Class B Exchanges	—		—		—		(33,946)
Issuance of non-controlling interest	25,749		—		25,749		6,500
Net loss attributable to non-controlling interests	(822)		(217)		(822)		(2,412)
Reclassification of non-controlling interests	—		27		(6,689)		214
Non-controlling interests balance as of end of period	$	24,927	$	15,888	$	24,927	$	15,888

Note 17. Fair Value Measurement

GAAP defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) assuming an orderly transaction in the most advantageous market at the measurement date. GAAP also establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These tiers include:

•Level 1 - inputs to the valuation methodology are quoted prices available in active markets for identical instruments as of the reporting date;

•Level 2 - inputs to the valuation methodology are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date and the fair value can be determined through the use of models or other valuation methodologies; and

•Level 3 - inputs to the valuation methodology are unobservable inputs in situations where there is little or no market activity for the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the particular asset or liability being measured.

Recurring Fair Value Measurements

In accordance with GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):


	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	5,496	$	—	$	—	$	5,496
Restricted cash and restricted investments (1)	118		—		—		118
Total fair value of assets measured on a recurring basis	$	5,614	$	—	$	—	$	5,614

Liabilities
Warrants (3)	$	—	$	—	$	11,112	$	11,112
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	11,112	$	11,112


	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets
Cash and cash equivalents (1)	$	3,698	$	—	$	—	$	3,698
Restricted cash and restricted investments (1)	1,004		—		—		1,004
Total fair value of assets measured on a recurring basis	$	4,702	$	—	$	—	$	4,702

Liabilities
Contingent consideration (2)	$	—	$	—	$	9,883	$	9,883
Warrants (3)	—		—		7,092		7,092
Total fair value of liabilities measured on a recurring basis	$	—	$	—	$	16,975	$	16,975

(1) Represents the cash and cash equivalents and restricted cash and restricted investments that were held in money market funds as of September 30, 2020 and December 31, 2019, as presented in the tables above.

(2) Represents the fair value of earn-out consideration related to the Passport, GlobalHealth, Inc. and other transactions, as described in Note 4.

(3) Represents the fair value of 1,513,786 shares issuable under the warrant agreements discussed in Note 9.

The Company recognizes any transfers between levels within the hierarchy as of the beginning of the reporting period. There were no transfers between fair value levels for the three and nine months ended September 30, 2020, respectively.

In the absence of observable market prices, the fair value is based on the best information available and involves a significant degree of judgment, taking into consideration a combination of internal and external factors, including the appropriate risk adjustments for non-performance and liquidity risks.

In conjunction with the Credit Agreement discussed in Note 9, the Company entered into warrant agreements whereby it agreed to sell to the holders of the warrants an aggregate of 1,513,786 shares of Class A common stock. The fair value of the warrants was estimated based on the Black-Scholes model which incorporates the constant price variation of the stock, the time value of money, the option's strike price, and the time to the option's expiry. The significant unobservable inputs used in the fair value measurement of the warrants are the stock price volatility and annual risk free rate. A significant increase in the stock price or discount rate in isolation would result in a significantly higher fair value of the contingent consideration.

The changes in our contingent consideration, measured at fair value, for which the Company uses Level 3 inputs to determine fair value are as follows (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Balance as of beginning of period	$	8,500	$	14,100	$	16,975	$	8,800
Additions	—		—		—		5,900
Settlements	—		—		(3,500)		(800)
Realized and unrealized gains (losses), net	2,612		(500)		(2,363)		(300)
Balance as of end of period	$	11,112	$	13,600	$	11,112	$	13,600

The following table summarizes the fair value (in thousands), valuation techniques and significant unobservable inputs of our Level 3 fair value measurements as of the periods presented:

September 30, 2020

Fair

Valuation

Significant

Assumption or

Value

Technique

Unobservable Inputs

Input Ranges

Warrants

11,112

Black-Scholes

Stock price volatility

62.2

Annual risk free rate

0.2


	December 31, 2019
	Fair		Valuation	Significant	Assumption or
	Value		Technique	Unobservable Inputs	Input Ranges
Passport contingent consideration	$	3,700	Real options approach	Risk-adjusted recurring revenue CAGR	93.9		%	(1)
				Discount rate/time value	4.8% - 5.3%

GlobalHealth contingent consideration	$	5,200	Monte Carlo simulation	Stock price volatility	80.0		%	(2)

Other contingent considerations	$	983	Management estimate	Adjusted EBITDA	$	19,235

Warrants	$	7,092	Black-Scholes	Stock price volatility	55.0		%
				Annual risk free rate	1.7		%

(1) The risk-adjusted recurring revenue CAGR is calculated over the five-year period 2017-2021. Given that there was no recurring revenue in 2016 and 2017, the calculation of the 2017 and 2018 growth rates is based on theoretical 2016 and 2017 recurring revenue of $1.0 million, resulting in a higher growth rate.

(2) Equity volatility based on Evolent’s daily stock price returns for a look-back period corresponding to the time until the second test date. The large one-day stock price drop on November 27, 2019, was excluded from the volatility calculation.

Nonrecurring Fair Value Measurements

In addition to the assets and liabilities that are recorded at fair value on a recurring basis, the Company records certain assets and liabilities at fair value on a nonrecurring basis as required by GAAP. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. This includes assets and liabilities recorded in business combinations or asset acquisitions, goodwill, intangible assets, property, plant and equipment, held-to-maturity investments and equity method investments. While not carried at fair value on a recurring basis, these items are continually monitored for indicators of impairment that would indicate current carrying value is greater than fair value. In those situations, the assets are considered impaired and written down to current fair value.

Other Fair Value Disclosures

The carrying amounts of cash and cash equivalents (those not held in a money market fund), restricted cash, receivables, prepaid expenses, accounts payable, accrued liabilities and accrued compensation approximate their fair values because of the relatively short-term maturities of these items and financial instruments.

See Note 9 for information regarding the fair value of the 2024 Notes, 2025 Notes and 2021 Notes.

Note 18. Related Parties

The entities described below are considered related parties and the balances and/or transactions with them are reported in our consolidated financial statements.

As discussed in Note 15, the Company had economic interests in several entities that were previously accounted for under the equity method of accounting, including Passport. The Company has allocated its proportional share of the investees’ earnings and losses each reporting period. In addition, Evolent has entered into services agreements with certain of the entities to provide certain management, operational and support services to help the entities manage elements of their service offerings.

The Company also works closely with UPMC, one of its founding investors. The Company’s relationship with UPMC is a subcontractor relationship where UPMC has agreed to execute certain tasks (primarily TPA services) relating to certain customer commitments. We also conduct business with a company in which UPMC holds a significant equity interest.

The following table presents assets and liabilities attributable to our related parties (in thousands):


	September 30, 2020		December 31, 2019
Assets
Accounts receivable	$	8,193	$	8,781
Prepaid expenses - current	161		1,592
Prepaid expenses and other noncurrent assets	5,858		2,709

Liabilities
Accounts payable	$	2,521	$	6,429
Accrued liabilities	1,062		2,583
Reserve for claims and performance-based arrangements	385		4,264

The following table presents revenues and expenses attributable to our related parties (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue
Transformation services	$	3,716	$	2,100	$	5,416	$	3,300
Platform and operations services	72,382		15,143		214,216		44,961

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses)	(63)		8,467		1,013		22,954
Selling, general and administrative expenses	—		229		97		772

Note 19. Segment Reporting

We define our reportable segments based on the way the CODM, currently the chief executive officer, manages the operations for purposes of allocating resources and assessing performance. We classify our operations into two reportable segments as follows:

•Services, which consists of two clinical solutions: (i) total cost of care management, and (ii) specialty care management services, and one administrative solution: comprehensive health plan administrative services; and

•True Health, which consists of a commercial health plan we operate in New Mexico that focuses on individual and family as well as small and large group businesses as well as the Federal Employee Health Benefits Program.

In the ordinary course of business, our reportable segments enter into transactions with one another. While intersegment transactions are treated like third-party transactions to determine segment performance, the revenues and expenses recognized by the segment that is the counterparty to the transaction are eliminated in consolidation and do not affect consolidated results.

The CODM uses revenue in accordance with U.S. GAAP and Adjusted EBITDA as the relevant segment performance measures to evaluate the performance of the segments and allocate resources.

Adjusted EBITDA is a segment performance financial measure that offers a useful view of the overall operation of our businesses and may be different than similarly-titled segment performance financial measures used by other companies.

Adjusted EBITDA is defined as EBITDA (net loss attributable to common shareholders of Evolent Health, Inc. before interest income, interest expense, (provision) benefit for income taxes, depreciation and amortization expenses), adjusted to exclude equity method investment impairment, loss on extinguishment of debt, gain (loss) from equity method investees, gain (loss) on disposal of assets, goodwill impairment, changes in fair value of contingent consideration and indemnification asset, other income (expense), net, net loss attributable to non-controlling interests, purchase accounting adjustments, stock-based compensation expense, severance costs, amortization of contract cost assets and acquisition-related costs.

Management considers revenue and Adjusted EBITDA to be the appropriate metrics to evaluate and compare the ongoing operating performance of our segments on a consistent basis across reporting periods as they eliminate the effect of items which are not indicative of each segment's core operating performance.

The following tables present our segment information (in thousands):


	Services		True Health		Intersegment Eliminations		Consolidated
Revenue
For the Three Months Ended September 30, 2020
Services:
Transformation services	$	4,807	$	—	$	—	$	4,807
Platform and operations services	234,914		—		(4,615)		230,299
Services revenue	239,721		—		(4,615)		235,106
True Health:
Premiums	—		29,487		—		29,487
Total revenue	$	239,721	$	29,487	$	(4,615)	$	264,593

For the Three Months Ended September 30, 2019
Services:
Transformation services	$	5,184	$	—	$	—	$	5,184
Platform and operations services	174,688		—		(3,250)		171,438
Services revenue	179,872		—		(3,250)		176,622
True Health:
Premiums	—		43,765		(244)		43,521
Total revenue	$	179,872	$	43,765	$	(3,494)	$	220,143

	Services		True Health		Segments Total
For the Three Months Ended September 30, 2020
Adjusted EBITDA	$	13,783	$	(1,100)	$	12,683

For the Three Months Ended September 30, 2019
Adjusted EBITDA	$	3,139	$	194	$	3,333


	Services		True Health		Intersegment Eliminations		Consolidated
Revenue
For the Nine Months Ended September 30, 2020
Services:
Transformation services	$	10,800	$	—	$	—	$	10,800
Platform and operations services	667,653		—		(15,079)		652,574
Services revenue	678,453		—		(15,079)		663,374
True Health:
Premiums	—		87,415		(279)		87,136
Total revenue	$	678,453	$	87,415	$	(15,358)	$	750,510

For the Nine Months Ended September 30, 2019
Services:
Transformation services	$	10,481	$	—	$	—	$	10,481
Platform and operations services	472,638		—		(9,386)		463,252
Services revenue	483,119		—		(9,386)		473,733
True Health:
Premiums	—		136,905		(780)		136,125
Total revenue	$	483,119	$	136,905	$	(10,166)	$	609,858

	Services		True Health		Segments Total
For the Nine Months Ended September 30, 2020
Adjusted EBITDA	$	28,178	$	(2,829)	$	25,349

For the Nine Months Ended September 30, 2019
Adjusted EBITDA	$	(21,157)	$	2,038	$	(19,119)

The following table presents our reconciliation of segments total Adjusted EBITDA to net loss attributable to Evolent Health, Inc. (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2020		2019		2020		2019
Net loss attributable to common shareholders of Evolent Health, Inc.	$	(37,348)	$	(25,521)	$	(319,621)	$	(103,875)
Less:
Interest income	1,288		1,124		3,049		3,026
Interest expense	(7,419)		(3,630)		(19,997)		(10,812)
(Provision) benefit for income taxes	(503)		849		3,131		(53)
Depreciation and amortization expenses	(14,694)		(15,408)		(46,610)		(44,966)
Equity method investment impairment	—		—		(47,133)		—
Loss on extinguishment of debt, net	(4,789)		—		(4,789)		—
Gain (loss) from equity method investees	(13,717)		(3,859)		11,014		(6,187)
Gain (loss) on disposal of assets	—		—		(6,447)		9,600
Goodwill impairment	—		—		(215,100)		—
Change in fair value of contingent consideration and indemnification asset	(2,570)		500		492		300
Other income (expense), net	(111)		(84)		170		(244)
Net loss attributable to non-controlling interests	822		217		822		2,412
Purchase accounting adjustments	—		(165)		—		(926)
Stock-based compensation expense	(3,164)		(5,758)		(10,375)		(15,045)
Severance costs	(1,757)		(307)		(7,890)		(14,790)
Amortization of contract cost assets	(2,610)		(1,061)		(3,817)		(2,613)
Acquisition costs	(807)		(1,272)		(1,490)		(4,458)
Adjusted EBITDA	$	12,683	$	3,333	$	25,349	$	(19,119)

Asset information by segment is not a key measure of performance used by the CODM. Accordingly, we have not disclosed asset information by segment.

Note 20. Reserve for Claims and Performance-Based Arrangements

The Company maintains reserves for its liabilities related to payments to providers and pharmacies under performance-based arrangements related to its total cost of care and specialty care management services. The Company also maintained reserves for claims incurred but not paid related to its capitation arrangement and for its health plan, True Health, in New Mexico.

Reserves for claims and performance-based arrangements for our Services and True Health segments reflect actual payments under performance-based arrangements and the ultimate cost of claims that have been incurred but not reported, including expected development on reported claims, those that have been reported but not yet paid (reported claims in process), and other medical care expenses and services payable that are primarily composed of accruals for incentives and other amounts payable to health care professionals and facilities. Reserves for claims and performance-based arrangements also reflect estimated amounts owed under the reinsurance agreements, as discussed further in Note 10.

The Company uses actuarial principles and assumptions that are consistently applied each reporting period and recognizes the actuarial best estimate of the ultimate liability along with a margin for adverse deviation. This approach is consistent with actuarial standards of practice that the liabilities be adequate under moderately adverse conditions.

This liability predominately consists of incurred but not reported amounts and reported claims in process including expected development on reported claims. The liability, for reserves related to its total cost of care and specialty care management services and True Health, is primarily calculated using "completion factors" developed by comparing the claim incurred date to the date claims were paid. Completion factors are impacted by several key items including changes in: 1) electronic (auto-adjudication) versus manual claim processing, 2) provider claims submission rates, 3) membership and 4) the mix of products.

The Company’s policy for reserves related to its total cost of care and specialty care management services and True Health is to use historical completion factors combined with an analysis of current trends and operational factors to develop current estimates of completion factors. The Company estimates the liability for claims incurred in each month by applying the current estimates of completion factors to the current paid claims data. This approach implicitly assumes that historical completion rates will be a useful indicator for the current period.

For more recent months, and for newer lines of business where there is not sufficient paid claims history to develop completion factors, the Company expects to rely more heavily on medical cost trend and expected loss ratio analysis that reflects expected claim payment patterns and other relevant operational considerations, or authorization analysis. Medical cost trend is primarily impacted by medical service utilization and unit costs that are affected by changes in the level and mix of medical benefits offered, including inpatient, outpatient and pharmacy, the impact of copays and deductibles, changes in provider practices and changes in consumer demographics and consumption behavior. Authorization analysis projects costs on an authorization-level basis and also accounts for the impact of copays and deductibles, unit cost and historic discontinuation rates for treatment.

For each reporting period, the Company compares key assumptions used to establish the reserves for claims and performance-based arrangements to actual experience. When actual experience differs from these assumptions, reserves for claims and performance-based arrangements are adjusted through current period net income. Additionally, the Company evaluates expected future developments and emerging trends that may impact key assumptions. The process used to determine this liability requires the Company to make critical accounting estimates that involve considerable judgment, reflecting the variability inherent in forecasting future claim payments. These estimates are highly sensitive to changes in the Company's key assumptions, specifically completion factors and medical cost trends.

Activity in reserves for claims and performance-based arrangements for the nine months ended September 30, 2020, was as follows (in thousands):


	For the Nine Months Ended September 30,
	2020						2019
	Services (1)(2)		True Health (2)		Total		Services (1)		True Health (3)		Total
Beginning balance	$	54,510	$	6,640	$	61,150	$	17,715	$	9,880	$	27,595

Incurred costs related to current year	315,634		63,571		379,205		$	165,581	$	108,881	$	274,462
Incurred costs related to prior year	2,327		1,488		3,815		(335)		(237)		(572)
Paid costs related to current year	335,599		55,014		390,613		138,491		43,191		181,682
Paid costs related to prior year	9,068		6,975		16,043		8,131		8,217		16,348
Change during the year	(26,706)		3,070		(23,636)		18,624		57,236		75,860

Impact of consolidation on reserves for claims and performance-based arrangements	164,297		—		164,297		—		—		—
Other adjustments (2)	6,502		—		6,502		(753)		(59,629)		(60,382)
Ending balance	$	198,603	$	9,710	$	208,313	$	35,586	$	7,487	$	43,073

(1) Costs incurred to provide specialty care management and Passport are recorded within cost of revenue in our statement of operations. Passport operations are not included in 2019 activity.

(2) There is no single or common claim frequency metric used in the health care industry. The Company believes a relevant metric for its health insurance business is the number of customers for whom an insured medical claim was paid. The number of claims processed for the Services and True Health segments for the nine months ended September 30, 2020 and 2019 were 764,095 and 251,393, respectively.

(3) Other adjustments to reserves for claims and performance-based arrangements for Services reflect changes in accrual for amounts payable to facilities and amounts owed to our payer partners for claims paid on our behalf. Other adjustments related to Passport and our True Health segment represent premiums received less administrative expenses related to the reinsurance agreements. Refer to Note 10 for additional information about the reinsurance agreements.

Note 21. Investments

Our investments held by wholly-owned subsidiaries other than Passport are classified as held-to-maturity as we have both the intent and ability to hold the investments until their individual maturities. Investments held by Passport are classified as available-for-sale upon their consolidation. The amortized cost, gross unrealized gains and losses, and fair value of our investments as measured using Level 2 inputs as of September 30, 2020 and December 31, 2019 (in thousands) were as follows:


	September 30, 2020								December 31, 2019
	Amortized Cost		Gross Unrealized				Fair Value		Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses						Gains		Losses
U.S. Treasury bills	$	8,920	$	404	$	—	$	9,324	$	10,784	$	270	$	—	$	11,054
Corporate bonds	1,708		139		—		1,847		1,705		70		—		1,775
Collateralized mortgage obligations	5,164		196		—		5,360		5,472		56		(5)		5,523
Corporate stock	130		—		—		130		—		—		—		—
Yankees	597		50		—		647		597		30		—		627
Total investments	$	16,519	$	789	$	—	$	17,308	$	18,558	$	426	$	(5)	$	18,979

The amortized cost and fair value of our investments by contractual maturities as of September 30, 2020 and December 31, 2019 (in thousands) were as follows:


	September 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	4,677	$	4,762	$	1,807	$	1,810
Due after one year through five years	11,842		12,546		16,121		16,542
Due after five years through ten years	—		—		630		627
Total investments	$	16,519	$	17,308	$	18,558	$	18,979

When a held-to-maturity investment is in an unrealized loss position, we assess whether or not we expect to recover the entire cost basis of the security, based on our best estimate of the present value of cash flows expected to be collected from the debt security. Factors considered in our analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit worthiness and forecasted performance of the investee. In cases where the estimated present value of future cash flows

is less than our cost basis, we recognize an other than temporary impairment and write the investment down to its fair value. The new cost basis would not be changed for subsequent recoveries in fair value.

There were no securities held in an unrealized loss position for more than twelve months as of September 30, 2020 or December 31, 2019. The Company held the following securities (in thousands) in an unrealized loss position for less than twelve months as of December 31, 2019, and expects to recover the entire cost basis of the security:


	September 30, 2020					December 31, 2019
	Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
Collateralized mortgage obligations	3	$	45	$	—	4	$	2,075	$	5

Note 22. Supplemental Cash Flow Information

The following represents supplemental cash flow information (in thousands):


	For the Nine Months Ended September 30,
	2020		2019
Supplemental Disclosure of Non-cash Investing and Financing Activities
Class A and Class B common stock issued in connection with business combinations	$	—	$	23,556
Increase to goodwill from measurement period adjustments/business combinations	2,200		350
Class A common stock issued for payment of earn-outs	4,185		800
Accrued property and equipment purchases	37		234
Accrued deferred financing costs	218		—
Consideration for asset acquisitions or business combinations	—		16,000
Effects of Leases
Operating cash flows from operating leases	10,287		9,378
Leased assets obtained in exchange for operating lease liabilities	(1,781)		31,661
Effects of Class B Exchanges
Decrease in non-controlling interests as a result of Class B Exchanges	—		33,946

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s financial condition and results of operations. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to consolidated financial statements presented in “Part 1 – Item 1. Financial Statements” of this Form 10-Q; our 2019 Form 10-K, including the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our current reports on Form 8-K filed in 2020.

INTRODUCTION

Business Overview

We are a market leader in the new era of value-based care, in which leading health systems and physician organizations, which we refer to as providers, as well as health plans, which we refer to as payers, are moving their business models from traditional fee-for-service (“FFS”) reimbursement to an increasingly integrated clinical and financial responsibility for populations. We refer to our provider and payer customers as partners. We consider value-based care to be the necessary convergence of health care payment and delivery. We believe the pace of this convergence is accelerating, driven by price pressure in traditional FFS health care, a market environment that is incentivizing value-based care models, growth in consumer-focused insurance programs, such as Medicare Advantage and managed Medicaid, and innovation in data and technology.

We were founded in 2011 by members of our management team, UPMC, an integrated delivery system based in Pittsburgh, Pennsylvania, and The Advisory Board Company. We provide integrated, technology-enabled services to our national network of leading health systems, physician organizations and national and regional payers across Medicare, Medicaid and commercial markets.

We manage our operations and allocate resources across two reportable segments, our Services segment and our True Health Segment. The Company’s Services segment provides our customers two clinical solutions: (i) total cost of care services and (ii) specialty care management services, and one administrative solution: comprehensive health plan administration services. These services enable payers and providers to manage patient health in a more cost-effective manner. The Company’s contracts are structured as a combination of monthly member service fees, percentage of plan premiums, shared medical savings arrangements and/or other performance-based arrangements including taking responsibility for all or substantially all of the cost of care. Our True Health segment consists of a commercial health plan we operate in New Mexico that focuses on individual and family as well as small and large businesses. All of our revenue is recognized in the United States and substantially all of our long-lived assets are located in the United States.

We have incurred operating losses since our inception, as we have invested heavily in resources to support our growth. We intend to continue to invest aggressively in the success of our partners, expand our geographic footprint and further develop our capabilities. We also expect to continue to incur operating losses for the foreseeable future and if we are unable to achieve our revenue growth and cost management objectives, we may not be able to achieve profitability. As a result of Passport not being awarded a contract under the RFP, we expect that our medium-term cash flow projections will be reduced.

As of the date the financial statements were available to be issued, we believe we have sufficient liquidity for the next 12 months.

Services Overview

Our Services segment includes clinical and administrative solutions designed to help our partners manage and administer patient health in a more cost-effective manner. We have two clinical solutions: (i) total cost of care management, and (ii) specialty care management services, and one administrative solution: comprehensive health plan administrative services. From time to time, we package our solutions under various go-to-market brand names to create product differentiation. Our partners may engage us to provide one type of solution, or multiple types of solutions, depending on specific needs.

Core elements of our total cost of care management services include: (1) Identifi®, our proprietary technology system that aggregates and analyzes data, manages care workflows and engages patients, (2) population health performance, which supports the delivery of patient-centric cost effective care, (3) delivery network alignment, comprising the development of high performance delivery networks and (4) integrated cost and revenue management solutions including PBM and patient risk scoring.

Our specialty care management services support a broad range of specialty care delivery stakeholders during their transition from fee-for-service to value-based care, independent of their stage of maturation and specific market dynamics. We focus on the oncology and cardiology markets with the objective of helping providers and payers deliver higher quality, more affordable care and we provide comprehensive quality management for oncology patients.

Our comprehensive health plan administration services help payers and providers assemble the complete infrastructure required to operate, manage and capitalize on a variety of financial and administrative management services, such as health plan services, risk management, analytics and reporting and leadership and management.

The majority of our Services revenue is derived from recurring multi-year contracts, which we refer to as platform and operations. Platform and operations services accounted for 87.0% and 77.9% of our consolidated revenue for the three months ended September 30, 2020 and 2019, respectively, and 87.0% and 76.0% of our consolidated revenue for the nine months ended September 30, 2020 and 2019, respectively. We believe the recurring, multi-year nature of our platform and operations contracts enables us to have strong visibility into future revenue. The amount of revenue in a given platform and operations contract is typically driven by: (i) the number of members that Evolent is contracted to manage, (ii) the population types being served (e.g., Medicare, Medicaid, Commercial), and (iii) the depth and breadth of the services and technology applications that our partners utilize from us. In situations involving clinical solutions, we typically elect to: (iv) participate alongside or co-own risk-sharing arrangements with our partners whereby we share in a portion of the upside and downside clinical performance, or by owning a portion of the underwriting results. We believe performance-based contracts align our partners’ incentives with our own and enables us to capture greater value from our contracts. We believe we are in the early stages of capitalizing on these aligned operating partnerships. We believe the current value-based care arrangements of our payer and provider partners represent a relatively small portion of their overall total opportunity.

Our services business model benefits from scale, as we leverage our purpose-built technology-enabled solutions and centralized resources in conjunction with the growth of our partners’ membership base. While our absolute investment in our centralized resources and technologies may increase over time, we expect it will decrease as a percentage of revenue as we are able to scale this investment across a broader group of partners. We expect to grow with current partners as they increase membership in their existing value-based operations, through expanding the number of services we provide to our existing partners, by adding new partners and by capturing value through risk-sharing arrangements.

As of September 30, 2020, we had contractual relationships with 35 operating partners and a significant portion of our revenue is concentrated with two partners. For three months ended September 30, 2020 and 2019, our revenue from Passport accounted for 20.7% and 22.2% of our total revenue, respectively, and our revenue from Cook County Health and Hospitals Systems accounted for 21.0% and less than 10% of total revenue, respectively. For the nine months ended September 30, 2020 and 2019, our revenue from Passport accounted for 22.6% and 16.4% of our total revenue, respectively, and our revenue from Cook County Health and Hospitals Systems accounted for 19.9% and less than 10.0% of total revenue, respectively. Subsequent to the consolidation of Passport on September 1, 2020, the Company does not expect any material revenue from Passport, however as part of the transaction, we entered into a new contract with Molina on similar terms to our prior services contract with Passport through December 31, 2020.

As of December 31, 2019, our receivables from Passport accounted for 3.3% of our accounts receivable and as of September 30, 2020 and December 31, 2019, our receivables from Cook County Health and Hospitals Systems accounted for 56.6% and 48.4% of our accounts receivable, respectively.

On July 16, 2020, Evolent and Passport entered into the Molina APA, which contemplated the sale by Passport of certain assets to Molina (or its permitted affiliate assignee) such as intellectual property rights of Passport and Passport’s rights under its Medicaid Contract. In addition, the Molina APA provided for the assumption by Molina of Passport’s obligations under the Medicaid Contract and certain provider and vendor agreements and real property leases arising following the transfer of such contracts. The Closing occurred on September 1, 2020 following receipt of the necessary approvals of certain governmental authorities, including the approval of CHFS and Kentucky Department of Insurance. Following the Closing, the Company does not expect any material revenue from Passport.

The amount of cash we ultimately receive in connection with the transactions consummated by the Molina APA, the wind down of Passport and related transactions will depend on a variety of factors, including, but not limited to, the retention of membership by Molina through open enrollment and Passport’s financial performance through the end of plan year 2020.

True Health

True Health is a physician-led health plan in New Mexico available through the commercial market for employer-sponsored health coverage and individual market as well as the Federal Employee Health Benefits Program. On January 2, 2018, Evolent acquired certain assets from New Mexico Health Connections, one of the first Consumer Operated and Oriented Plans established following the implementation of the ACA, including a commercial plan and health plan management services organization. The acquired assets were contributed to a new entity, True Health New Mexico, Inc., a wholly-owned subsidiary of Evolent. Our True Health segment derives revenue from premiums earned over the terms of the related insurance policies. True Health also derived revenue from reinsurance premiums assumed from NMHC under the terms of the reinsurance agreement which was terminated during the fourth quarter of 2019. Refer to “Part I - Item 1. Financial Statements - Note 10” for additional discussion regarding the Company’s

reinsurance agreements. In September 2020, the Company announced it remains focused on maximizing long-term shareholder value through efficient allocation of capital to accelerate its core Services business and as a result is exploring strategic alternatives with respect to True Health.

Background and Recent Events

Evolent Health’s Response to COVID-19

On March 11, 2020, the World Health Organization (the “WHO”) declared the novel strain of coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. While response to the COVID-19 outbreak continues to rapidly evolve, it has led to aggressive actions to reduce the spread of the disease that have seriously disrupted activities in large segments of the economy. We are continuing to monitor the COVID-19 outbreak and its impact on our business.

Because of the nature of the services we provide, market dynamics in our end markets and with our significant customers, to date the COVID-19 pandemic has not materially impacted our financial condition or results of operations or our outlook. As of September 30, 2020 we had cash and cash equivalents of $370.5 million and as of the date the financial statements were available to be issued we believe our current cash balance is sufficient to meet our liquidity needs for the next twelve months. The COVID-19 crisis has also adversely impacted global access to capital and caused significant volatility in financial markets. Significant deterioration of the U.S. and global economies could have a significant adverse impact on our investment income, the value of our investments, or future liquidity needs. Although the impact of the COVID-19 pandemic on our business has not been severe to date, the long-term impact of the pandemic on our partners and the global economy is uncertain and will depend on various factors, including the scope, severity and duration of the pandemic. A prolonged economic downturn or recession resulting from the pandemic could adversely affect many of our partners which could, in turn, adversely impact our business, financial condition and results of operations.

Evolent’s focus throughout this pandemic has been the health and safety of its employees and their families, as well as ensuring that we continue to furnish high quality service to our partners. Evolent has deployed a multi-faceted response to COVID-19, overseen by its Emergency Preparedness Team, led by the General Counsel and Chief Compliance Officer, that focuses on maintaining its workforce in a manner that does not disrupt service delivery or operations. Evolent is closely monitoring and overseeing any issues of noncompliance or deficiencies with client operational service level agreements and continuing to review contractual business requirements in light of state and federal mandates, emergency laws and orders, and available financial support opportunities. Evolent is also mindful of the impact COVID-19 has on its vendors and subcontractors, and we will continue to work with them regarding our collective obligations to Evolent’s clients. We required a COVID-19 Business Continuity Attestation from subcontractors and vendors in April, confirming that operational and financial obligations will be met and aiming to ensure that privacy and security risks or incidents can be mitigated and disclosed in a timely manner. The Company continues to periodically follow up with subcontractors and vendors on this issue.

Summary of Impact of COVID-19

In evaluating the impact of COVID-19 on our Services business, we considered, among other factors, the nature of the services we provide, end market trends and outlook and customer-specific trends. In evaluating our health plan businesses, we focused on possible changes in membership and medical utilization trends.

Services Business

Our two most significant service offerings in terms of revenue are specialty care management and administrative health services. Because both of these services offerings provide critical services to our clients and their members and have relatively long lead times to implement such services, we currently do not anticipate any material near-term disruption to the relevant contracts as a result of the pandemic.

The three key end-markets we serve are Medicaid, Medicare and Commercial.

We expect to see changes in membership and medical utilization in our end-markets as a result of the COVID-19 pandemic. The pandemic has resulted in a significant increase in unemployment in the United States. Historically, Medicaid enrollment has increased during periods of rising unemployment as individuals lose access to employer sponsored healthcare and turn to government sponsored healthcare. In addition, with respect to Medicaid, many states (including Florida, Kentucky and Illinois) put in place new rules during the pandemic eliminating the ability of Medicaid health plans to dis-enroll non-paying members, as well as waiving certain eligibility requirements, which together we expect will result in higher membership during the period of the pandemic. We expect to see the opposite trend in the commercial market, where employees who are made redundant lose access to employer sponsored healthcare. We do not expect to see meaningful changes in membership in the Medicare market as a result of COVID-19. In aggregate, as more than 50% of the lives on our platform are currently in Medicaid and we generally earn revenue with respect to those lives based on a

per member per month model, we expect to see a net benefit in our business from increased membership in that market in the near-term. We cannot predict the magnitude of this potential benefit, or how long it will last.

With respect to medical utilization, following the declaration of the pandemic by the WHO, many state-wide mandates deferred non-essential medical procedures to allow hospitals to focus on providing care to COVID-19 patients. Across all markets, our partners experienced declines in non-essential care during the nine months ended September 30, 2020, offset in part by increased costs for care of COVID-19 patients. These declines reversed in late in the second quarter. We continue to monitor medical utilization trends closely as the pandemic progresses. Beginning late in the first quarter after declaration of the pandemic and continuing into the second quarter, we have seen a modest benefit in our business from lower utilization trends. However, we cannot predict with any certainty the net impact of lower utilization on our business, as it is possible we will experience a surge in utilization if and when consumer behavior changes (for example if the novel coronavirus is controlled by a vaccine or other measures).

Our two largest customers in terms of revenue, Passport and Cook County Health and Hospitals Systems, together accounted for approximately 41.7% and 42.5% of revenue for the three and nine months ended September 30, 2020, respectively, and both participate in the Medicaid market. During the three and nine months ended September 30, 2020, we saw a modest increase in the membership at both health plans; further increases in unemployment in Illinois could result in higher Medicaid enrollment in the future. In addition, during the three months ended September 30, 2020 we saw modestly lower claims volume at both clients tied to State mandates curtailing non-essential care.

Health Plans

Our True Health plan serves approximately 17,000 members in the small and large group market in New Mexico as well as 6,700 members in the individual and federal employee markets in New Mexico. At the end of September 2020, the membership in group plans was not meaningfully changed relative to the year ended December 31, 2019. Beginning at the end of the three months ended March 31, 2020, we observed a decline in medical utilization tied to a state-wide mandate prohibiting non-essential care in the period from March 13, 2020, resulting in slightly lower than expected claims expenses. Of our three equity method health plans, all are in Medicaid. In our Medicaid equity method investees (Lighthouse Health Plan and Miami Children’s Health Plan in Florida) and our wholly-owned Medicaid plan (Passport Health in Kentucky), we saw modest increases in membership during the three months ended September 30, 2020 however reduced medical utilization resulted in reduced claims expenses in the same period. While we cannot estimate the magnitude of reduced medical utilization and its impact on our business, we expect this trend to continue until the COVID-19 pandemic moderates.

Overall, we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources. We are actively monitoring the ongoing situation and may take further actions that change our operations if required by law or that we determine are in the best interests of our employees or partners.

Transactions

The Company has undertaken several transactions, some of which may impact year-to-year comparisons. The following is a discussion of certain of those transactions.

Passport

On December 30, 2019, UHC, PHS I, the Company and Passport Buyer, closed a transaction whereby Passport Buyer acquired substantially all of the assets and assumed substantially all of the liabilities of UHC and PHS I for $70.0 million in cash and issued a 30% equity interest in the Passport Buyer to the Sponsors. As of December 30, 2019, Justify Holdings, Inc. became Passport Health Plan, Inc.

On September 1, 2020, Passport and Molina completed the closing of the transaction contemplated by the Molina APA and Passport’s Medicaid Contract was novated to Molina (the “Closing”). As a result, Passport began to wind down its business. Prior to the Closing of this transaction, the Company accounted for its investment in Passport as an unconsolidated variable interest entity under the equity method of accounting. As a result of the Closing of the transaction, the Company concluded that a reconsideration event occurred whereby Passport was determined to be a voting interest entity and that Evolent had a controlling financial interest in Passport; accordingly, the Company consolidated Passport as of September 1, 2020 in its consolidated financial statements. Refer to “Part I - Item 1. Financial Statements - Note 4” for additional discussion regarding the investment in Passport.

GlobalHealth

increase statutory capital reserves to no lower than 300%. In connection with the investment, GlobalHealth, Inc. transferred 100% of the equity interests in GlobalHealth, Inc. to the new investors for no consideration. Closing of this transaction occurred on May 13, 2020. As a result of this transaction, we recorded a non-cash impairment charge of approximately $47.1 million, representing the total value of our investment, in impairment of equity method investments on the consolidated statements of operations for the three months ended March 31, 2020.

Convertible Debt Issuance, Extinguishment of Debt and Repayment of Notes

In August 2020, the Company issued $117.1 million aggregate principal amount of its 3.50% Convertible Senior Notes due 2024 (the “2024 Notes”) in privately negotiated exchange and/or subscription agreements, with certain holders of its outstanding 2021 Notes and certain new investor. The Company issued $84.2 million aggregate principal amount of 2024 Notes in exchange for $84.2 million aggregate principal amount of the 2021 Notes and an aggregate cash payment of $2.5 million, and issued $32.8 million aggregate principal amount of New Notes for cash at par. We incurred $3.0 million of debt issuance costs in connection with the 2024 Notes. The closing of the private placement of the 2024 Notes occurred on August 19, 2020.

The exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment to noteholders of $2.5 million, which is included in loss on extinguishment of debt, net on the consolidated statement of operations. We incurred $3.0 million of debt issuance costs in connection with the exchange.

In August 2020, we repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on extinguishment of debt. Refer to “Part I - Item 1. Financial Statements - Note 9” for additional discussion relating to the convertible debt issuance, extinguishment of debt and partial repayment of 2021 Notes.

Critical Accounting Policies and Estimates

The MD&A included in our 2019 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. There have been no material changes to our critical accounting policies and estimates since our 2019 Form 10-K. See “Item 1. Financial Statements - Note 2” in this Form 10-Q for a summary of our significant accounting policies and see “Item 1. Financial Statements - Note 3” in this Form 10-Q for information regarding the Company’s adoption of new accounting standards.

Summary of Significant Accounting Policies

Certain GAAP policies that significantly affect the determination of our financial position, results of operations and cash flows, are summarized below. See “Part II - Item 8. Financial Statements and Supplementary Data - Note 2” in our 2019 Form 10-K for a complete summary of our significant accounting policies.

Goodwill

Our goodwill impairment analysis first assesses qualitative factors to determine whether events or circumstances existed that would lead the Company to conclude it is more likely than not that the fair value of a reporting unit is below its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is below the carrying amount, a quantitative goodwill assessment is required. In the quantitative evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value and a charge is reported in goodwill impairment on our consolidated statements of operations and comprehensive income (loss). See “Part I - Item 1. Financial Statements - Note 8” in this Form 10-Q for additional discussion regarding the goodwill impairment tests conducted during the nine months ended September 30, 2020 and the year ended December 31, 2019.

Adoption of New Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequently issued additional guidance that modified ASU 2016-13. The standard requires an entity to change its accounting approach for measuring and recognizing credit losses on certain financial assets measured at amortized cost, including trade receivables, certain non-trade receivables, customer advances and certain off-balance sheet credit exposures, by replacing the existing “incurred loss” framework with an expected credit loss recognition model. The new standard results in earlier recognition of credit losses based on past events, current conditions, and reasonable and supportable forecasts. The standard is effective for entities with fiscal years beginning after December 15, 2019, including interim periods within such fiscal years. We adopted the requirements of this standard effective January 1, 2020 using the modified retrospective approach and recorded a cumulative effect adjustment of $3.0 million to January 1, 2020 retained earnings (accumulated deficit). In our previous accounting policy for trade receivables and non-trade receivables, we maintained an allowance for doubtful accounts based on specific identification. Under the new accounting standard, we utilize several factors to develop historical losses, including aging schedules, customer creditworthiness, and historical payment experience, which are then adjusted for current conditions and reasonable and supportable forecasts in measurement of the allowance. In addition, for customer advances and certain off-balance sheet credit exposures, we evaluate the allowance through a discounted cash flow approach. Refer to Note 6 for additional disclosures related to current expected credit losses.

RESULTS OF OPERATIONS

Evolent Health, Inc. is a holding company and its principal asset is all of the Class A common units in Evolent Health LLC, which has owned all of our operating assets and substantially all of our business since inception. The financial results of Evolent Health LLC are consolidated in the financial statements of Evolent Health, Inc.

Key Components of our Results of Operations

Revenue

Our services segment derives revenue from three sources: (1) transformation services, (2) platform and operations services and (3) premiums earned.

Transformation Services Revenue

Platform and Operations Services Revenue

Platform and Operations services are typically multi-year arrangements with customers to provide various clinical and administrative solutions. Our clinical solutions are designed to lower the medical expenses of our partners and include our total cost of care and specialty care management services; our administrative solutions are designed to provide comprehensive health plan operations and claims processing services, and also include transition or run-out services to customers receiving primarily TPA services. Contracts to provide these services may be developed on an integrated basis. For purposes of revenue disaggregation, we classify contracts including both clinical and administrative solutions into the category corresponding to the majority of services provided under those contracts.

Contracts with Multiple Performance Obligations

Premiums Earned

Our True Health segment derives revenue from premiums that are earned over the terms of the related insurance policies. The portion of premiums that will be earned in the future or are received prior to the effectiveness of the policy are deferred and reported as premiums received in advance. True Health also derived revenue from reinsurance premiums assumed from NMHC under the terms of the reinsurance agreements, prior to their termination in the fourth quarter of 2019.

During the third quarter of 2019, the Company terminated the reinsurance agreement with NMHC effective in the fourth quarter of 2019, approximately one and a half months prior to its scheduled end.

Cost of Revenue (exclusive of depreciation and amortization)

Our cost of revenue includes direct expenses and shared resources that perform services in direct support of clients. Costs consist primarily of employee-related expenses (including compensation, benefits and stock-based compensation), expenses for TPA support and other services, as well as other professional fees. In certain cases, our cost of revenue also includes claims and capitation payments to providers and payments for pharmaceutical treatments and other healthcare expenditures through performance-based arrangements.

Claims Expenses

Our claims expenses consist of the direct medical expenses incurred by our health plans, including expenses incurred related to the reinsurance agreement. Claims expenses are recognized in the period in which services are provided and include amounts that have been paid by us through the reporting date, as well as estimated medical claims and benefits payable for costs that have been incurred but not paid by us as of the reporting date. Claims expenses include, among other items, fee-for-service claims, pharmacy benefits, various other related medical costs and expenses related to our reinsurance agreement. We use judgment to determine the appropriate assumptions for determining the required estimates.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist of employee-related expenses (including compensation, benefits and stock-based compensation) for selling and marketing, corporate development, finance, legal, human resources, corporate information technology, professional fees and other corporate expenses associated with these functional areas. Selling, general and administrative expenses also include costs associated with our centralized infrastructure and research and development activities to support our network development capabilities, claims processing services, including PBM administration, technology infrastructure, clinical program development and data analytics.

Depreciation and amortization expense

Depreciation and amortization expenses consist of the amortization of intangible assets associated with the step up in fair value of Evolent Health LLC’s assets and liabilities for the Offering Reorganization, amortization of intangible assets recorded as part of our various business combinations and asset acquisitions and depreciation of property and equipment, including the amortization of capitalized software.

Evolent Health, Inc. Consolidated Results


	For the Three Months Ended September 30, 2020						Change Over Prior Period			For the Nine Months Ended September 30,						Change Over Prior Period
(in thousands, except percentages)	2020			2019			$		%	2020			2019			$		%
Revenue
Services:
Transformation services	$	4,807		$	5,184		$	(377)	(7.3)%	$	10,800		$	10,481		$	319	3.0%
Platform and operations services	230,299			171,438			58,861		34.3%	652,574			463,252			189,322		40.9%
Total Services	235,106			176,622			58,484		33.1%	663,374			473,733			189,641		40.0%
True Health:
Premiums	29,487			43,521			(14,034)		(32.2)%	87,136			136,125			(48,989)		(36.0)%
Total revenue	264,593			220,143			44,450		20.2%	750,510			609,858			140,652		23.1%

Expenses
Cost of revenue (exclusive of depreciation and amortization expenses presented separately below)	183,165			131,763			51,402		39.0%	524,630			357,587			167,043		46.7%
Claims expenses	21,325			34,802			(13,477)		(38.7)%	63,136			108,644			(45,508)		(41.9)%
Selling, general and administrative expenses	55,758			58,808			(3,050)		(5.2)%	160,967			200,578			(39,611)		(19.7)%
Depreciation and amortization expenses	14,694			15,408			(714)		(4.6)%	46,610			44,966			1,644		3.7%
Loss on extinguishment of debt, net	4,789			—			4,789		100.0%	4,789			—			4,789		100.0%
Loss (gain) on disposal of assets	—			—			—		—%	6,447			(9,600)			16,047		(167.2)%
Goodwill impairment	—			—			—		—%	215,100			—			215,100		100.0%
Change in fair value of contingent consideration and indemnification asset	2,570			(500)			3,070		(614.0)%	(492)			(300)			(192)		64.0%
Total operating expenses	282,301			240,281			42,020		17.5%	1,021,187			701,875			319,312		45.5%
Operating loss	$	(17,708)		$	(20,138)		$	2,430	12.1%	$	(270,677)		$	(92,017)		$	(178,660)	(194.2)%

Transformation services revenue as a % of total revenue	1.8		%	2.4		%				1.4		%	1.7		%
Platform and operations services revenue as a % of total revenue	87.0		%	77.9		%				87.0		%	76.0		%
Premiums as a % of total revenue	11.1		%	19.8		%				11.6		%	22.3		%
Cost of revenue as a % of services revenue	77.9		%	74.6		%				79.1		%	75.5		%
Claims expenses as a % of premiums	72.3		%	80.0		%				72.5		%	79.8		%
Selling, general and administrative expenses as a % of total revenue	21.1		%	26.7		%				21.4		%	32.9		%

Comparison of the Results for the three months ended September 30, 2020 to 2019

Revenue

Total revenue increased by $44.5 million, or 20.2%, to $264.6 million for the three months ended September 30, 2020 as compared to the same period in 2019.

Transformation services revenue decreased by $(0.4) million, or (7.3)%, to $4.8 million for the three months ended September 30, 2020 as compared to the same period in 2019 due primarily to the timing of implementation activities. Transformation services revenue accounted for 1.8% and 2.4% of our total revenue for the three months ended September 30, 2020 and 2019, respectively.

Platform and operations services revenue increased by $58.9 million, or 34.3%, to $230.3 million for the three months ended September 30, 2020, as compared to 2019, primarily as a result of additional revenue from existing partners, new partner additions, cross-sell and an increase in our average PMPM fee. Platform and operations services revenue accounted for 87.0% and 77.9% of our total revenue for the three months ended September 30, 2020 and 2019, respectively.

Lives on platform are calculated by summing members on our value-based care and comprehensive health plan administrative platform, as well as members covered for oncology specialty care services and members covered for cardiology specialty care services. Members covered for more than one category are counted in each category. Management uses lives on platform as a supplemental performance measure because we believe that it provides insight into the unit economics of our services. We believe that this measure is also useful to investors because it allows further insight into the period over period operational performance. We ended the quarter with 35 and 39 operating partners as of September 30, 2020 and 2019, respectively.

Premiums accounted for $29.5 million and $43.5 million, or 11.1% and 19.8% of our total revenue for the three months ended September 30, 2020 and 2019, respectively. Premiums decreased by $(14.0) million, or (32.2)%, to $29.5 million, for three months ended September 30, 2020, as compared to 2019. The decrease is primarily attributable to the termination of the quota-share reinsurance agreement with NMHC signed in the fourth quarter of 2018. Under this reinsurance agreement, NMHC ceded 90% of its gross premiums to the Company and the Company indemnified NMHC for 90% of its claims liability. The agreement qualified for reinsurance accounting due to the deemed risk transfer, and therefore we recorded the gross premiums assumed on our consolidated statements of operations and comprehensive income (loss). Effective in the fourth quarter of 2019, the Company terminated the reinsurance agreement with NMHC and we expect future True Health revenues to be diminished as a result. Refer to “Part I - Item 1. Financial Statements - Note 10” in this Form 10-Q for further discussion of the reinsurance agreement.

Cost of Revenue

Cost of revenue increased by $51.4 million, or 39.0%, to $183.2 million for three months ended September 30, 2020, as compared to 2019. Cost of revenue increased by approximately $52.8 million period over period as a result of growth of our revenue generating services and additional payments related to performance-based arrangements, an increase of $1.0 million increase in professional fees due to the nature and timing of our projects, offset, in part by a decrease of $1.2 million in our technology services, TPA fees, personnel costs and other costs period over period. Approximately $0.4 million and $1.6 million of total personnel costs was attributable to stock-based compensation expense for the three months ended September 30, 2020 and 2019, respectively. Cost of revenue represented 77.9% and 74.6% of total services revenue for the three months ended September 30, 2020 and 2019, respectively. Our cost of revenue increased as a percentage of our total services revenue due to a change in the mix of our service offerings during 2019; however, we expect our cost of revenue to decrease as a percentage of total services revenue over the longer-term subject to the composition of our growth.

Claims Expenses

Claims expenses attributable to our True Health segment were $21.3 million for three months ended September 30, 2020, as compared to $34.8 million for the prior period. The decrease is primarily attributable to the quota-share reinsurance agreement with NMHC signed in the fourth quarter of 2018 that terminated in the fourth quarter of 2019 and savings from cancellation of non-essential services such as elective and non-emergency medical services as a result of COVID-19. Claims expenses represented 72.3% and 80.0% of premiums for the three months ended September 30, 2020, as compared to 2019 respectively. We expect future claims expenses to decrease as a percentage of premiums revenue due to the termination of the reinsurance agreement. Refer to “Part I - Item 1. Financial Statements - Note 10” in this Form 10-Q for further discussion of the reinsurance agreement.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses decreased by $3.1 million, or 5.2%, to $55.8 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. During the three months ended September 30, 2020, personnel costs decreased by $5.8 million period over period due to a reduction in employee headcount. Approximately $2.7 million and $4.2 million of total personnel costs were attributable to stock-based compensation expense for the three months ended September 30, 2020, and 2019, respectively. The decrease in our stock-based compensation expense included in total personnel costs was driven primarily by the elimination of performance-based RSU awards. Conversely, technology costs increased by $1.1 million period over period as a result of the growing customer base and service offerings. Legal fees decreased by $0.4 million and other costs increased by $1.6 million for three months ended September 30, 2020, as compared to 2019, respectively, due to the nature and timing of our projects. Transaction, transition and severance costs accounted for approximately $1.8 million and $1.5 million of total selling, general

and administrative expenses for the three months ended September 30, 2020, and 2019, respectively. Selling, general and administrative expenses represented 21.1% and 26.7% of total revenue for the three months ended September 30, 2020, and 2019, respectively. While our selling, general and administrative expenses are expected to grow as our business grows, we expect them to continue to decrease as a percentage of our total revenue over the long term.

Depreciation and Amortization Expenses

Depreciation and amortization expenses decreased $0.7 million, or (4.6)%, to $14.7 million for three months ended September 30, 2020, as compared to the three months ended September 30, 2019. The decrease was due primarily to lower amortization of existing technology assets, offset, in part by additional depreciation and amortization expenses related to assets acquired through business combinations and asset acquisitions during 2019 and the increase in amortization expense for internal-use software. We expect depreciation and amortization expenses to increase in future periods as we continue to capitalize internal-use software and amortize intangible assets resulting from asset acquisitions and business combinations (including possible future transactions).

Loss on extinguishment of debt, net

In August 2020, as part of the issuance of the 2024 Notes, the Company issued $84.2 million aggregate principal amount of the 2024 Notes in exchange for $84.2 million aggregate principal of its 2021 Notes. These exchanges were accounted for as an extinguishment resulting in a net loss on extinguishment of debt of $4.8 million, including an aggregate cash payment to noteholders of $2.5 million, which is included in loss on extinguishment of debt, net on the consolidated statement of operations.

In August 2020, we repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on extinguishment of debt.

Change in Fair Value of Contingent Consideration and Indemnification Asset

We recorded a gain (loss) on change in fair value of contingent consideration and indemnification asset of $2.6 million and $(0.5) million the three months ended September 30, 2020 and 2019, respectively. This variance is the result of changes in the fair values of contingent liabilities acquired as a result of business combinations and asset acquisitions during 2016, 2018 and 2019. See “Part I - Item 1. Financial Statements - Note 17” in this Form 10-Q for further details regarding the fair value of our mark-to-market liabilities.

Comparison of the Results for the Nine Months Ended September 30, 2020 to 2019

Revenue

Total revenue increased by $140.7 million, or 23.1%, to $750.5 million for the nine months ended September 30, 2020, as compared to the same period in 2019.

Transformation services revenue increased by $0.3 million, or 3.0%, to $10.8 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, due primarily to the timing of implementation activities. Transformation services revenue accounted for 1.4% and 1.7% of our total revenue for the nine months ended September 30, 2020 and 2019, respectively.

Platform and operations services revenue increased by $189.3 million, or 40.9%, to $652.6 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, primarily as a result of additional revenue from existing partners, new partner additions, cross-sell and an increase in our average PMPM fee. Platform and operations services revenue accounted for 87.0% and 76.0% of our total revenue for the nine months ended September 30, 2020 and 2019, respectively.

Premiums accounted for $87.1 million and $136.1 million, or 11.6% and 22.3% of our total revenue for the nine months ended September 30, 2020 and 2019, respectively. Premiums decreased by $49.0 million, or 36.0%, to $87.1 million, for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The decrease is primarily attributable to the termination of the quota-share reinsurance agreement with NMHC signed in the fourth quarter of 2018. Under this reinsurance

agreement, NMHC ceded 90% of its gross premiums to the Company and the Company indemnified NMHC for 90% of its claims liability. The agreement qualified for reinsurance accounting due to the deemed risk transfer, and therefore we recorded the gross premiums assumed on our consolidated statements of operations and comprehensive income (loss). Effective in the fourth quarter of 2019, the Company terminated the reinsurance agreement with NMHC and we expect future True Health revenues to be diminished as a result. Refer to “Part I - Item 1. Financial Statements - Note 10” in this Form 10-Q for further discussion of the reinsurance agreement.

Cost of Revenue

Cost of revenue increased by $167.0 million, or 46.7%, to $524.6 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. Cost of revenue increased by approximately $164.7 million period over period as a result of growth of our revenue generating services and additional payments related to performance-based arrangements, an increase of $2.4 million increase in professional fees due to the nature and timing of our projects and an increase of $1.1 million in our technology services, TPA fees, personnel costs and other costs period over period. Approximately $1.4 million and $3.3 million of total personnel costs was attributable to stock-based compensation expense for the nine months ended September 30, 2020 and 2019, respectively. Cost of revenue represented 79.1% and 75.5% of total services revenue for the nine months ended September 30, 2020 and 2019, respectively. Our cost of revenue increased as a percentage of our total services revenue due to a change in the mix of our service offerings during 2019; however, we expect our cost of revenue to decrease as a percentage of total services revenue over the longer-term subject to the composition of our growth.

Claims Expenses

Claims expenses attributable to our True Health segment were $63.1 million for the nine months ended September 30, 2020, as compared to $108.6 million for the prior period. The decrease is primarily attributable to the quota-share reinsurance agreement with NMHC signed in the fourth quarter of 2018 that terminated in the fourth quarter of 2019 and savings from cancellation of non-essential services such as elective and non-emergency medical services as a result of COVID-19. Claims expenses represented 72.5% and 79.8% of premiums for the nine months ended September 30, 2020, as compared to 2019, respectively. We expect future claims expenses to decrease as a percentage of premiums revenue due to the termination of the reinsurance agreement. Refer to “Part I - Item 1. Financial Statements - Note 10” in this Form 10-Q for further discussion of the reinsurance agreement.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses decreased by $39.6 million, or 19.7%, to $161.0 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. During the nine months ended September 30, 2020, personnel costs decreased by $36.9 million period over period due to a reduction in employee headcount. Approximately $9.0 million and $11.8 million of total personnel costs were attributable to stock-based compensation expense for the nine months ended September 30, 2020 and 2019, respectively. The decrease in our stock-based compensation expense included in total personnel costs was driven primarily by the elimination of performance-based RSU awards. Technology costs increased by $3.7 million period over period as a result of the growing customer base and service offerings. Legal fees increased by $2.0 million and other costs decreased by $0.2 million for the nine months ended September 30, 2020, as compared to 2019, respectively, due to the nature and timing of our projects. Transaction, transition and severance costs accounted for approximately $7.9 million and $19.1 million of total selling, general and administrative expenses for the nine months ended September 30, 2020 and 2019, respectively. Selling, general and administrative expenses represented 21.4% and 32.9% of total revenue for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, respectively. While our selling, general and administrative expenses are expected to grow as our business grows, we expect them to continue to decrease as a percentage of our total revenue over the long term.

Depreciation and Amortization Expenses

Depreciation and amortization expenses increased $1.6 million, or 3.7%, to $46.6 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The increase was due primarily to additional depreciation and amortization expenses related to assets acquired through business combinations and asset acquisitions during 2019 and the increase in amortization expense for internal-use software. We expect depreciation and amortization expenses to increase in future periods as we continue to capitalize internal-use software and amortize intangible assets resulting from asset acquisitions and business combinations (including possible future transactions).

Goodwill Impairment

During the nine months ended September 30, 2020, we recorded a non-cash impairment charge of $215.1 million on our consolidated statements of operations as we determined that the implied fair value of goodwill of one of the three reporting units in the Services

segment was less than the carrying amount. See “Part I - Item 1. Financial Statements - Note 8” for further details of the impairment charge to goodwill.

Loss on Disposal of Assets

Loss on extinguishment of debt, net

In August 2020, we repurchased $14.0 million of the 2021 Notes with $13.9 million of cash and recorded an immaterial gain on extinguishment of debt.

Change in Fair Value of Contingent Consideration and Indemnification Asset

We recorded a loss on change in fair value of contingent consideration and indemnification asset of $0.5 million and $0.3 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, respectively. This variance is the result of changes in the fair values of contingent liabilities acquired as a result of business combinations and asset acquisitions during 2016, 2018 and 2019. See “Part I - Item 1. Financial Statements - Note 17” in this Form 10-Q for further details regarding the fair value of our mark-to-market liabilities.

Discussion of Non-Operating Results

Interest Income

Interest income consists of interest from investing cash in money market funds, interest from both our short-term and long-term investments, interest earned on the capital-only reinsurance agreement with NMHC and interest from the implementation loan and Passport Note. We recorded interest income of $1.3 million and $3.0 million for the three and nine months ended September 30, 2020, respectively, and $1.1 million and $3.0 million for the three and nine months ended September 30, 2019, respectively. Interest income decreased during 2020 as a result of lower interest income generated from the capital-only reinsurance agreement with NMHC which was terminated in the fourth quarter of 2019.

Interest Expense

Our interest expense is primarily attributable to our 2021 Notes, 2024 Notes, 2025 Notes and Credit Agreement with Ares Capital Corporation. The Company issued its 2021 Notes in December 2016. Holders of the 2021 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year at a rate equal to 2.00% per annum. In addition, we incurred $4.6 million of debt issuance costs in connection with the 2021 Notes, which we are amortizing to non-cash interest expense using the straight-line method over the contractual term of the 2021 Notes. The Company issued its 2024 Notes in August 2020. Holders of the 2024 Notes are entitled to cash interest payments, which are payable semiannually in arrears on June 1 and December 1 of each year at a rate equal to 3.50% per annum. In addition, the 2024 Notes contain a cash conversion option, which resulted in a debt discount of $38.1 million, allocated to equity. The amount allocated to equity, along with $3.0 million of debt issuance costs in connection with the 2024 Notes, will be amortized to non-cash interest expense using the effective interest method over the contractual term of the 2024 Notes. The Company issued its 2025 Notes in October 2018. Holders of the 2025 Notes are entitled to cash interest payments, which are payable semiannually in arrears on April 15 and October 15 of each year at a rate equal to 1.50% per annum. The 2025 Notes contain a cash conversion option, which resulted in a debt discount of $71.8 million, allocated to equity. The amount allocated to equity, along with $3.4 million of issuance costs, will be amortized to non-cash interest expense using the effective interest method over the contractual term of the 2025 Notes. The Company entered into the Credit Agreement in December 2019 with Ares Credit Corporation in connection with its acquisition of Passport. Ares Capital Corporation is entitled to cash interest payments, which are payable quarterly in arrears on the last day of each March, June, September and December. The interest rate for each loan under the Senior Credit Facilities is calculated, at the option of the Borrower, at either the eurodollar rate plus 8.00%, or the base rate plus 7.00%. A commitment fee of 1.00% per annum is payable by the Borrower quarterly in arrears on the unused portion of the DDTL Facility.

We recorded interest expense (including amortization of deferred financing costs) of approximately $7.4 million and $20.0 million for the three and nine months ended September 30, 2020, respectively, and $3.6 million and $10.8 million for the three and nine months ended September 30, 2019. See “Part I - Item 1. Financial Statements - Note 9” in this Form 10-Q for further details.

Impairment of Equity Method Investments

Gain (Loss) from Equity Method Investees

The Company has acquired economic interests in several entities that are accounted for under the equity method of accounting. The Company is allocated its proportional share of the investees’ earnings and losses each reporting period. The Company’s proportional share of the gains (losses) from these investments was approximately $(13.7) million and $11.0 million for the three and nine months ended September 30, 2020, respectively, and $(3.9) million and $(6.2) million for the three and nine months ended September 30, 2019, respectively.

Provision (Benefit) for Income Taxes

The Company recorded $0.5 million and $(3.1) million in income tax expense (benefit) for the three and nine months ended September 30, 2020, respectively, which resulted in effective tax rates of (1.3)% and 1.0%, respectively. The Company recorded $0.8 million and less than $0.1 million in income tax (benefit) expense for the three and nine months ended September 30, 2019, respectively, which resulted in effective tax rates of 3.2% and (0.1)%, respectively. The difference between our effective tax rate and our statutory rate is primarily due to the change in valuation allowance for current year losses. The Company continues to recognize a full valuation allowance against its net deferred tax asset, apart from a limited amount of indefinite-lived deferred tax assets for which a limited amount of indefinite-lived deferred tax liability provides a source of income.

Net Income (Loss) Attributable to Non-controlling Interests

For the three and nine months ended September 30, 2020 our results reflected net losses of $0.8 million attributable to non-controlling interests in Passport, which represented 4.6% and 0.3% of operating losses. For the three and nine months ended September 30, 2019, our results reflected net losses of $0.2 million and $2.4 million attributable to non-controlling interests, which represented 1.1% and 2.6% of the operating losses. See “Part I - Item 1. Financial Statements - Note 16” in this Form 10-Q for additional discussion of our non-controlling interests.

REVIEW OF CONSOLIDATED FINANCIAL CONDITION

Liquidity and Capital Resources

Since its inception, the Company has incurred operating losses and net cash outflows from operations. The Company incurred operating losses of $270.7 million and $92.0 million for the nine months ended September 30, 2020 and 2019, respectively. Net cash and restricted cash from (used in) operating activities was $(3.4) million and $(55.8) million for the nine months ended September 30, 2020 and 2019, respectively.

As of September 30, 2020, the Company had $370.5 million of cash and cash equivalents and $31.4 million in restricted cash and restricted investments.

We believe our current cash and cash equivalents and other sources of liquidity will be sufficient to meet our working capital and capital expenditure requirements for the next twelve months as of the date these financial statements were available to be issued. Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities and the timing and extent of our spending to support our investment efforts and expansion into other markets. We may also seek to invest in, or acquire complementary businesses, applications or technologies.

Cash Flows

The following summary of cash flows (in thousands) has been derived from our financial statements included in “Part II - Item 8. Financial Statements and Supplementary Data:”


	For the Nine Months Ended September 30,
	2020		2019
Net cash and restricted cash used in operating activities	$	(3,374)	$	(55,832)
Net cash and restricted cash from (used in) investing activities	263,297		(102,460)
Net cash and restricted cash from (used in) financing activities	12,054		(24,299)

Operating Activities

Cash flows used in operating activities of $3.4 million in the nine months ended September 30, 2020 were due primarily to our net loss of $320.4 million, partially offset by non-cash items, including an impairment of goodwill of $215.1 million, an impairment of an equity method investment of $47.1 million, depreciation and amortization expenses of $46.6 million, stock-based compensation expense of $10.4 million and a loss on the disposal of assets of $6.4 million. Our operating cash inflows were affected by the timing of our customer and vendor payments. In addition to these non-cash items, increases in accounts payable, accrued liabilities and claims reserves contributed approximately $10.6 million to our cash outflows. Those cash inflows were partially offset by an increase in accounts receivable and contract assets and contract costs assets and a decrease in accrued compensation and employee benefits contributed of approximately $28.3 million.

Cash flows used in operating activities of $55.8 million for the nine months ended September 30, 2019, were due primarily to our net loss of $106.3 million, partially offset by non-cash items, including depreciation and amortization expenses of $45.0 million, stock-based compensation expense of $15.0 million, amortization of deferred financing costs and contract costs assets of $11.1 million, and loss from equity investees of $6.2 million, as well as non-cash gain on disposal of assets of $9.6 million. Our operating cash outflows were affected by the timing of our customer and vendor payments. Increases in prepaid expenses, contract cost assets and right-of-use operating assets, combined with a decrease in accrued liabilities, accounts payable and other long-term liabilities, contributed approximately $70.4 million to our cash outflows. Those cash outflows were offset by increases in accrued compensation and employee benefits, reserves for claims and performance-based arrangements, deferred revenue and operating lease liabilities, combined with a decrease in accounts receivable and contract assets, of approximately $54.3 million.

Investing Activities

Cash flows from investing activities of $263.3 million in the nine months ended September 30, 2020 were primarily attributable to cash flows from the impact of the initial consolidation of Passport of $159.8 million, maturities and sales of investments of $140.9 million, offset, in part by investments in internal-use software and purchases of property and equipment of $23.6 million, disposal of non-strategic assets of $2.3 million and purchases of investments of $11.2 million.

Cash flows used in investing activities of $102.5 million for the nine months ended September 30, 2019, were primarily attributable to purchases of property and equipment of $26.4 million, cash paid for asset acquisitions, business combinations and equity method investments of $25.7 million, amounts advanced to satisfy regulatory capital requirements of $46.4 million and purchases of investments of $8.9 million, partially offset by a customer’s repayment of advance to satisfy regulatory capital requirements of $5.4 million.

Financing Activities

Cash flows from financing activities of $12.1 million in the nine months ended September 30, 2020 were primarily related to $30.1 million from proceeds of convertible debt, offset, in part by repurchase of our 2021 Notes of $16.4 million, $1.4 million of taxes withheld and paid for vests of restricted stock units and a $2.2 million decrease in working capital balances held on behalf of our partners for claims processing services. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed.

Cash flows used in financing activities of approximately $24.3 million for the nine months ended September 30, 2019, were primarily related to a decrease of $22.8 million in the amount of restricted cash held on behalf of our partners for claims processing services. These are pass-through amounts and can fluctuate materially from period to period depending on the timing of when the claims are processed. There was an additional cash outflow of approximately $2.4 million related to taxes withheld and paid for vesting of restricted stock units, partially offset by approximately $1.0 million as a result of proceeds from stock options exercises.

Contractual Obligations

Our estimated contractual obligations (in thousands) as of September 30, 2020, were as follows:


	2020		2021-2022		2023-2024		2025+		Total
Operating leases for facilities	$	3,049	$	22,661	$	17,938	$	56,093	$	99,741
Passport buyout commitment	—		20,000		—		—		20,000
Purchase obligations related to vendor contracts	3,357		8,877		93		—		12,327
Debt interest payments	4,394		27,084		26,549		2,588		60,615
Debt principal repayment	—		26,737		192,051		172,500		391,288
Total contractual obligations	$	10,800	$	105,359	$	236,631	$	231,181	$	583,971

During the nine months ended September 30, 2020, the only material change outside the ordinary course of business in the contractual obligations set forth above was the addition of the principal and interest payments related to the 2024 Notes and the exchange and repurchase of 2021 Notes. Refer to the discussion in “Part I - Item 1. Financial Statements - Note 9” for additional information on our long-term debt.

Restricted Cash and Restricted Investments

Restricted cash and restricted investments of $31.4 million is carried at cost and includes cash held on behalf of other entities for pharmacy and claims management services of $16.0 million, collateral for letters of credit required as security deposits for facility leases of $3.5 million, amounts held with financial institutions for risk-sharing arrangements of $9.9 million and other restricted balances as of September 30, 2020. See “Part I - Item 1. Financial Statements - Note 2” for further details of the Company’s restricted cash balances.

Uses of Capital

Our principal uses of cash are in the operation and expansion of our business. The Company does not anticipate paying a cash dividend on our Class A common stock in the foreseeable future.

OTHER MATTERS

Off-balance Sheet Arrangements

Through September 30, 2020, the Company had not entered into any off-balance sheet arrangements, other than the operating leases and notes receivable noted above, and did not have any holdings in variable interest entities, other than the unconsolidated variable interest entities discussed in “Part I - Item 1. Financial Statements - Note 15” within this Form 10-Q.

Related Party Transactions

In the ordinary course of business, we enter into transactions with related parties. Information regarding transactions and amounts with related parties is discussed in “Part I - Item 1. Financial Statements - Note 18” within this Form 10-Q.

Other Factors Affecting Our Business

In general, our business is subject to a changing social, economic, legal, legislative and regulatory environment. Although the eventual effect on us of the changing environment in which we operate remains uncertain, these factors and others could have a material effect on our results of operations, liquidity and capital resources. Factors that could cause actual results to differ materially from those set forth in this section are described in “Part I - Item 1A. Risk Factors” and “Forward-Looking Statements – Cautionary Language.”

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.

Interest Rate Risk

As of September 30, 2020, the Company had cash and cash equivalents and restricted cash and restricted investments of $402.0 million, which consisted of bank deposits with FDIC participating banks of $394.0 million, bank deposits in international banks of $0.9 million, cash equivalents deposited in a money-market fund of $5.6 million, and $1.4 million of restricted investments that are classified as held-to-maturity investments. In addition, we have investments of $15.1 million, which are classified as held-to-maturity investments.

Changes in interest rates affect the interest earned on our cash and cash equivalents (including restricted cash). Our investments (including restricted investments) are classified as held-to-maturity and therefore are not subject to interest rate risk. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

As of September 30, 2020, we had $316.3 million of aggregate principal amount of convertible notes outstanding, which are fixed rate instruments and not subject to fluctuations in interest rates. Conversely, as of September 30, 2020, we had $75.0 million of aggregate principal amount in a secured term loan, which are floating rate instruments and subject to fluctuations in interest rates. Refer to the discussion in “Part I - Item 1. Financial Statements - Note 9” for additional information on our long-term debt.

Foreign Currency Exchange Risk

Beginning in 2018, we have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the Indian Rupee. In general, we are a net payor of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may, in the future, negatively affect our operating results as expressed in U.S. dollars. At this time, we have not entered into, but in the future we may enter into, derivatives or other financial instruments in an attempt to hedge our foreign currency exchange risk. It is difficult to predict the effect hedging activities would have on our results of operations. We recognized foreign currency translation gains (losses) of $71 thousand and $(0.1) million for the three and nine months ended September 30, 2020.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, and in light of the material weaknesses in the design and operation of our internal control over financial reporting as disclosed in our 2019 Form 10-K, our principal executive officer and principal financial officer have concluded that, as of September 30, 2020, our disclosure controls and procedures were not effective. The Company is implementing remediation efforts to address the material weaknesses as described further in “Plan of Remediation to Address Material Weaknesses in Internal Control over Financial Reporting” below.

We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

Description of Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management previously identified material weaknesses in its internal controls over financial reporting related to the areas below.

Information and Communication - We did not maintain adequate user access role definitions within certain instances of one of our claims processing systems inherited in an acquisition that supported claims for True Health that are included in claims expense and certain claims for specialty care businesses that are included in our cost of revenue (the “System”) because of inadequate segregation of duties. This was a deficiency in the design of the control.

Control Activities - We did not maintain adequate controls over the set-up and modifications of claims data in the System. We lacked evidence of the operation of controls over claims data received from certain third-party service providers. These were deficiencies in the design and operation of the controls.

None of the control deficiencies resulted in any adjustments to our 2019 annual or interim 2020 consolidated financial statements. However, these deficiencies could result in a material misstatement to our claims expense and cost of revenue account balances that may not be prevented or detected. Accordingly, management has determined that these control deficiencies constitute material weaknesses.

Plan of Remediation to Address Material Weaknesses in Internal Controls over Financial Reporting

During the three months ended September 30, 2020, management designed and implemented system enhancements, role-based access, and updated polices and control procedures related to user access role definitions and segregation of duties within one of our claims processing systems. We are currently testing the operating effectiveness of these newly designed controls.

Management has developed and implemented remediation efforts to address the material weaknesses in the Control Activities described above. These remediation efforts include the following:

•System enhancements, implementation of role-based access, and updated polices and control procedures related to user access role definitions and segregation of duties within certain instances of one of our claims processing systems;

•Expanding controls and/or applying other appropriate procedures to address the design and operation of internal controls relating to the set-up and modification of claims data in the System; and

•Enhancing procedures for the identification of control activities and monitoring of control performance to ensure that the components of internal control relating to claims data received from certain third-party service providers are present and functioning.

As we continue to evaluate and work to improve our internal control over financial reporting, we may decide to take additional measures to address control deficiencies or modify the remediation plans described above. The material weaknesses cannot be considered remediated until the remediated controls operate effectively for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Changes in Internal Control over Financial Reporting

Except as otherwise described herein, there were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II

Item 1. Legal Proceedings

For information regarding legal proceedings, see “Part I – Item 1. Financial Statements - Note 10 - Commitments and Contingencies - Litigation Matters” of this Form 10-Q.

Item 1A. Risk Factors

Risk factors

Our significant business risks are described in Item 1A to our Annual Report on Form 10-K for the year ended December 31, 2019. These risk factors are supplemented for the item described below. The risks and uncertainties we describe are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business or operations. Any adverse effect on our business, financial condition or operating results could result in a decline in the value of our securities and the loss of all or part of your investment.

The conditional conversion feature of the 2024 Notes and the 2025 Notes, if triggered, may adversely affect our financial condition and operating results.

In the event the conditional conversion feature of the 2024 Notes or the 2025 Notes is triggered, holders of such notes will be entitled to convert such notes at any time during specified periods at their option. If one or more holders elect to convert their 2024 Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our Class A common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the 2024 Notes or the 2025 Notes, as applicable, as a current rather than long-term liability, which would result in a material reduction of our net working capital.

The financial benefits we expect to receive as a result of our sale of certain assets of Passport to Molina may not be realized.

On September 1, 2020, Passport and Molina completed the closing of the transaction contemplated by the Molina APA and Passport’s Medicaid Contract was novated to Molina. In the event certain conditions are not fulfilled, we may not realize the economic benefits we expect to derive from the transaction or the transaction may otherwise be rescinded. The amount of cash we ultimately receive in connection with the transactions consummated by the Molina APA, the wind down of Passport and related transactions could be adversely affected by a number of factors including litigation from third parties, the outcome of ongoing protests against the Kentucky Medicaid awards for 2021 and the results of litigation related thereto, the performance of Passport through 2020 and the results of Medicaid open enrollment in the Commonwealth of Kentucky. In addition, our return of capital from Passport is subject to regulatory approval from the Kentucky Department of Insurance, and we cannot control or predict the timing of such capital return.

Our business may be negatively affected by the ongoing COVID-19 pandemic.

Our operations have been and continue to be affected by the ongoing global COVID-19 pandemic and the resulting volatility and uncertainty it has caused in the U.S. and international markets. The extent to which COVID-19 impacts our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence. Factors that may determine the severity of the impact include the duration of the outbreak, new information which may emerge concerning the severity of COVID-19, employee mobility and productivity and the actions to contain COVID-19 or treat its impact (including federal, state and local directives to remain at home or forced business closures), among others.

The COVID-19 pandemic may impact our business, financial condition, cash flows, or results of operations in a number of ways, including the following:

•Our subsidiary True Health New Mexico could experience delays or non-payment of premium as well as membership decreases.

•State Medicaid agencies may experience budget pressures as a result of the pandemic which could negatively impact payments to certain of our Medicaid health plan customers and potentially cause us to incur additional bad debt expense.

•The impact of the pandemic on certain partners could result in delayed or reduced payments to us.

•As our employees and our partners’ employees work from home and access our system remotely, we may be subject to heightened security and privacy risks, including the risks of cyber attacks and privacy incidents.

•It has created, and may continue to create, volatility in the capital markets and such volatility could have a negative impact on our ability to access those markets on acceptable terms, or at all.

•Significant deterioration of the U.S. and global economies could have a significant adverse impact on our investment income and the value of our investments.

The COVID-19 pandemic may also have the effect of heightening many of the other risks described in the other disclosures, including the risk factors, contained in our other filings with the SEC, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness. We cannot at this time predict the impact of the COVID-19 pandemic, but it could materially adversely affect our business, including our financial position, results of operations and/or cash flows.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

EVOLENT HEALTH, INC.

Exhibit Index


2.1*						Agreement and Plan of Merger, dated July 12, 2016, by and among Evolent Health, Inc., Electra Merger Sub, LLC, Valence Health, Inc. and North Bridge Growth Management Company LLC and Philip Kamp, in their capacity as the Securityholders’ Representative, filed as Exhibit 2.1 to the Company’s Report on Form 8-K filed with the SEC on July 14, 2016, and incorporated herein by reference

2.2*						First Amendment to Agreement and Plan of Merger, dated October 3, 2016, by and among Evolent Health, Inc., Electra Merger Sub, LLC, Valence Health, Inc. and North Bridge Growth Management Company LLC and Philip Kamp, in their capacity as securityholders’ representative, filed as Exhibit 2.2 to the Company’s Report on Form 8-K filed with the SEC on October 3, 2016, and incorporated herein by reference

2.3*						Agreement and Plan of Merger, dated September 7, 2018, by and among Evolent Health, Inc., Evolent Health LLC, Element Merger Sub, Inc., NCIS Holdings, Inc. and New Century Investment, LLC, in the capacity set forth therein, filed as Exhibit 2.1 to the Company’s Report on Form 8-K filed with the SEC on September 12, 2018, and incorporated herein by reference

2.4*						Asset Purchase Agreement, dated May 28, 2019, by and among University Health Care, Inc., d/b/a Passport Health Plan, Passport Health Solutions, LLC, Evolent Health, Inc. and Justify Holdings, Inc., filed as Exhibit 2.4 to the Company’s Report on Form 10-Q filed with the SEC on August 9, 2019, and incorporated herein by reference

2.5*						First Amendment to Asset Purchase Agreement, dated as of December 30, 2019, by and among University Health Care, Inc., d/b/a Passport Health Plan, Passport Health Solutions, LLC, Justify Holdings, Inc., and Evolent Health, Inc., filed as Exhibit 2.1 to the Company’s Report on Form 8-K with the SEC on December 31, 2019, and incorporated herein by reference

4.1*						Indenture, dated as of August 19, 2020, by and between Evolent Health, Inc. and U.S. Bank National Association, as trustee, filed as Exhibit 4.1 to the Company’s report on Form 8-K with the SEC on August 25, 2020, and incorporated herein by reference

4.2*						Form of 3.50% Convertible Senior Note due 2024 (included as Exhibit A to Exhibit 4.1), filed as Exhibit 4.2 to the Company’s report on Form 8-K with the SEC on August 25, 2020, and incorporated herein by reference

10.1*						Asset Purchase Agreement, dated July 16, 2020, by and among Passport Health Plan, Inc., Evolent Health LLC, and Molina Healthcare, Inc., filed as Exhibit 10.1 to the Company’s report on Form 10-Q with the SEC on August 7, 2020, and incorporated herein by reference

10.2*						First Amendment to Credit Agreement, dated as of August 13, 2020, by and among Evolent Health, Inc., Evolent Health LLC, its subsidiaries signatory thereto or thereafter designated as guarantors, the lenders from time to time party thereto and Ares Capital Corporation, administrative agent and collateral agent for the lenders, filed as Exhibit 10.1 to the Company’s report on Form 8-K with the SEC on August 25, 2020, and incorporated herein by reference

31.1						Certification of the Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

31.2						Certification of the Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002

32.1						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2						Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema Document

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB						XBRL Taxonomy Extension Label Linkbase Document

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document

104						The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL

* The Company agrees to furnish supplementally to the SEC a copy of any omitted schedule or exhibit upon the request of the SEC in accordance with Item 601(b)(2) of Regulation S-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


EVOLENT HEALTH, INC.
Registrant

By:			/s/ John Johnson
Name:			John Johnson
Title:			Chief Financial Officer

By:			/s/ Aammaad Shams
Name:			Aammaad Shams
Title:			Controller

Dated: November 5, 2020